Financing your renovation: save taxes and avoid unnecessary costs

Author: Bernhard Bircher-Suits, FundCom AG

Are you planning an attic extension or do you want to convert your apartment to suit your age? Or maybe you want to turn an empty child’s room into a home office? One thing is clear: Renovations can cost a lot of time, stress and money, so good planning is essential.

The five phases of your construction project

Ideally, construction projects have the following five phases: pre-project phase, project phase, execution preparation, execution phase and final phase – with checks and approvals as well as documentation and final invoice. If it’s unclear whether a construction project is even feasible from a structural and legal perspective, you’ll need a feasibility study from a specialist such as an architect before starting the pre-project.

Attic conversions require a great deal of expertise

One thing is clear: for complex attic or roof conversions in Switzerland, in addition to architects, you generally need experts such as structural engineers, acoustics technicians, roofers, carpenters, electricians, installers, painters and plasterers, drywall builders, insulation specialists, and so on. They help avoid unnecessary errors such as a poorly insulated roof and unnecessary follow-up costs.

It's worth investing in professional expertise, especially for major renovations. Michael Hügli is Managing Director of the Swiss trades network Buildigo. He has the following advice: ‘Invest enough time in planning. Not only to avoid unwanted surprises, but also to discuss possible options.’ 

Tip: If possible, agree a flat fee with architects to keep costs manageable. Get at least three quotes for each task.

2. Financing: how to find the best solution

And what’s the best way to finance your renovation project? As part of a pre-project, an architect can show you the costs plus/minus 15 to 20 percent for renovations. They can quickly become expensive if there are surprises such as asbestos in the building fabric or structural problems. There are three financing options worth checking:

Financing with equity and reserves

Use any savings for smaller projects, e.g. turning a room into a room with a fitted kitchen (guide price for fitted kitchen: approx. CHF 15,000 to CHF 30,000). This is usually the most affordable solution, as no loan interest is incurred. Also make sure that you always have a certain amount on hand for unforeseen expenses.

Older or poorly documented buildings are more likely to incur additional costs (e.g. due to outdated pipes or dilapidated building fabric). For major renovations to buildings older than 40 years, reserves of 15 to 20 percent of the total budget are recommended. For simpler projects, such as interior fittings, 10 percent is often enough. 

Tip: Funds from pillar 2 or pillar 3 can be used for the renovation of residential property under certain conditions. It’s a good idea to ask your pension provider what is financially possible in your case.

Mortgage increase option

Many Swiss banks offer to increase existing mortgages on residential property for major renovations. The prerequisite is usually that the conversion increases the value of the property and that the loan-to-value ratio and affordability criteria are met. In concrete terms, this means that the new total mortgage must be financially affordable for you. Secondly, the loan must not exceed the limit of 80 percent of the current market value – a credit institution must adhere to this ‘golden rule’ even after a conversion. 

Building loan option

A building loan is ideal if the renovation is to be carried out in stages. You only pay loan interest on the respective loan amount used. Upon completion of the work, the loan is converted into a mortgage. Before applying for a building loan, you should make sure that you meet the key requirements:

• Solid equity: At least 20% of the construction costs must be financed from your own resources.

• Affordability: Housing costs (interest, amortisation, utility costs) must not exceed a third of your gross income.

• Plans and cost estimate: Detailed project planning with cost estimates is required.

3. Benefit from subsidies and tax deductions

A conversion can also bring tax benefits. In Switzerland, value-preserving renovation and maintenance costs can be deducted from taxable income. This includes, for example:

• Painting, plumbing, carpentry and roofing work

• Window replacement

• Thermal insulation

However, costs that increase the value of the property, such as adding a conservatory, are not deductible. Keep all receipts and invoices well organised so that you don’t forget to deduct any value-preserving maintenance costs on your tax return.

A helpful hint: each canton sets out in fact sheets what work can and cannot be deducted from taxable income. 

4. Sustainability: building for the future

Sustainable renovations don't just save energy in the long term – they are often rewarded by government funding programmes. Consider, for example:

• A heat pump to replace an old oil heating system

• Solar cells on the roof

• Energy-efficient thermal insulation

The cantons determine individually which measures they fund and under which conditions. The basis for this is the cantons’ harmonised funding model (HFM 2015). All programmes of the federal government, cantons, cities, municipalities and regional energy suppliers can be accessed in the Energie Franken database with just a few clicks of the mouse, filtered by postcode.

The cantonal building energy certificate (GEAK) helps you plan your construction project in advance and is sometimes also a prerequisite for receiving subsidies. 

In summary: good planning saves costs

Renovations are an investment in your quality of life and the value of your property. With careful planning, the right financing and clever tax tricks, you can complete your project without any nasty surprises.