Anyone who has a renovation carried out also has to pay for it, and how you do that partly determines how the collaboration with the contractor goes. This article is an explanation of mechanisms: how a construction deposit works, what the difference is between increasing your mortgage and a separate loan, what a valuer means by "value after renovation" and which tax principles the Belastingdienst (Dutch Tax Administration) publishes. It is not a comparison of providers and not a recommendation; which route suits your situation depends on your income, your home and your plans, and that is for a mortgage or financial adviser to assess. We deliberately do not quote interest rates or amounts: they change and they are personal.
The routes at a glance
- Your own money. You pay the contractor's instalments directly from your savings account. No lender, no valuation, no conditions; but the money does have to be there when the instalments fall due, including a margin for additional work. According to the Belastingdienst, costs you pay with your own money are not deductible.
- Increasing your existing mortgage. You borrow extra from your current lender, within the limits of your income and the value of the home. If the increase fits within the existing mortgage registration at the Kadaster (Land Registry), it can be done without a new notarial deed ("onderhands verhogen", a private increase); otherwise a new registration or a second mortgage is needed. The lender usually puts the renovation portion into a construction deposit.
- Second mortgage. A separate mortgage loan, sometimes with a different lender, with its own second-ranking registration at the Kadaster. The first mortgage holder takes priority on a sale.
- Personal loan (consumer credit). A loan without mortgage security, with a fixed term and fixed repayments. No valuation and no notary; the term is usually shorter than for a mortgage. The AFM (Dutch Authority for the Financial Markets) describes the various forms of consumer credit and what to look out for when taking one out.
- Energiebespaarlening (energy-saving loan) from the Nationaal Warmtefonds (National Heat Fund). A loan intended exclusively for energy-saving measures on an existing home that you both own and live in; there is also a version for VvE's (owners' associations). The Warmtefonds was set up with support from the Dutch government and has schemes for owners with limited borrowing capacity.
How a construction deposit works
A bouwdepot (construction deposit), also called a verbouwingsdepot (renovation deposit) in the case of a renovation, is a blocked account with your lender into which the borrowed renovation amount is paid. You do not receive the money in one go; you submit invoices from the contractor, the installer or the DIY store, and the lender pays them from the deposit, directly to the contractor or to you if you have already paid the invoice yourself. NHG (Nationale Hypotheek Garantie, the Dutch National Mortgage Guarantee) describes it like this: the lender holds the full cost of the quality improvement in deposit, and for each invoice you choose whether to pay it yourself first or have it paid out directly. The lender checks whether an invoice fits within the submitted renovation specification; a new kitchen is on that list, new furniture is not.
Two features of the deposit often surprise people. First, the interest: you pay mortgage interest on the full loan from the moment the loan starts, but on the balance still in the deposit you receive interest from the lender, which is offset against the interest paid. How large the difference is depends on your lender. Second, the term: a deposit is temporary. NHG mentions a common term of around two years, although this varies by lender. If the renovation is finished and there is still money in the deposit, that remainder is usually used to pay down the loan; it is therefore not a pot of savings you can spend freely. Ask in advance about the deposit term, the way you submit invoices and how long a payout takes.
Valuation and "value after renovation"
A lender will not lend more than a certain proportion of the value of the home. For a renovation that improves the home, the valuer may include in their report, alongside the current market value, the market value after renovation, based on the renovation specification and the quotes you supply. The renovation then counts as collateral before it has been carried out; that is why the money stays in the deposit until the work is done. Under NHG's conditions, the total loan may not exceed the full value of the home after renovation, with limited extra room when energy-saving measures are financed along with it. Lenders without NHG apply similar limits based on the statutory lending standards. A realistic, itemised quote is therefore also a financing document; how to read one is covered in Comparing quotes: how to read a building quote. Not every renovation increases the value by the same amount: a dormer or an extra bathroom can do more than a comparable sum spent on painting, and the valuer assesses that independently.
Sustainability: extra borrowing capacity and the Warmtefonds
The annual lending standards for mortgages, set by the cabinet on the advice of Nibud (the Dutch National Institute for Family Finance Information), include a separate mechanism for sustainability: households may borrow an extra amount on top of their normal income-based capacity, which must be spent entirely on energy-saving measures. The size of that extra amount depends on the home's energy label and is set again each year; for the most efficient labels the room is smaller or even nil, because there is little energy left to save. Which label your home has and which measures improve it is explained in Improving your energy label: which measures really count.
NHG has two variants. With the Energiebespaarbudget (energy-saving budget), when taking out, switching or increasing your mortgage, you borrow an amount for energy-saving measures without having to choose in advance which ones; the amount goes into a construction deposit and you claim it later with invoices. Any budget left over is used to pay down the loan. With the Energiebesparende Voorzieningen (energy-saving provisions) scheme, you set out the measures in advance in a renovation specification and the calculation uses the value after renovation. Which measures count is set out in an NHG list: insulation of walls, roof, floor and pipes, HR++ or triple glazing, insulating frames and doors in combination with that glazing, a heat pump, a shower heat-recovery system, solar panels and an energy-efficient ventilation system in combination with other measures. The Nationaal Warmtefonds offers a separate loan outside the mortgage for the same category of measures, with a claims system based on invoices and an application that remains valid for a limited period; the contractor or installer does not need to have started yet, but you do need quotes.
Tax: the main points
The Belastingdienst publishes the conditions under which interest on a loan for a renovation can be deductible. In broad terms: the loan must have been used for the purchase, renovation or maintenance of your own home (eigen woning, your main residence), the spending must be inseparably connected to the home (window frames, bathroom, kitchen, fixed floors, insulation, solar panels on the roof; not loose furnishings) and the loan must be repaid at least on an annuity or linear basis over thirty years. Interest on an interest-only loan is not deductible. You must be able to show with invoices and receipts that the money was spent on the renovation, so keep them. For a loan without a deposit, the interest is deductible on the whole loan for the first six months and after that only on the part actually spent. For a renovation deposit a two-year rule applies, under which the deposit interest received is offset against the interest paid after the first six months. The costs of the renovation itself are never deductible, and neither are costs paid with your own money. A personal loan can qualify as owner-occupied home debt under the same conditions, provided the spending and repayment requirements are met. These are the published main points; applying them to your tax return is work for an adviser or the Belastingdienst itself.
Which documents does the lender ask for?
- A renovation specification: a list of works with amounts, usually backed up by quotes from the contractor and installers, sometimes on the lender's own form.
- A valuation report with the market value before and after renovation; for smaller renovations some lenders accept a model-based or hybrid valuation.
- Drawings and, where necessary, the omgevingsvergunning (environmental permit) or confirmation that the work is permit-free.
- Your income details: payslips, employer's statement or annual accounts, and an overview of existing loans.
- For sustainability measures: the energy label and a specification of the measures that fall under the recognised list.
So ask the contractor for a quote broken down by item; a single total is difficult to process for a deposit.
Timing with the contractor: instalments versus payouts
This is where things go wrong in practice. The contractor sends an invoice for an instalment with a fourteen-day payment term; the lender sometimes needs a week or more to process a claim from the deposit, and only pays if the invoice falls within the specification. So agree three things before the work starts. First, the order: the mortgage increase must be finalised and the deposit funded before the first instalment falls due; a contractor who wants to start before the financing is final is in effect asking you to pre-finance from your own funds. Second, the route: have the contractor draw up invoices so that they can be claimed directly (description per item, your name and address, VAT shown separately) and agree whether you pay first or the lender pays directly. Third, additional work: anything not in the specification will not come out of the deposit. Keep your own money in reserve for it or have the specification amended in good time. How to divide the instalments sensibly yourself, so that payment follows progress, is covered in Paying a deposit to your contractor. An experienced contractor or carpenter knows the rhythm of construction deposits and can align their payment schedule with it; ask about it when you discuss the quote.
Finally: this article describes general mechanisms and is not financial advice. Which form of financing, term and repayment suit your situation is something to discuss with an independent mortgage or financial adviser.