Taking a home loan for renovation do’s and don’ts

Renovating an old flat or extending a family house is one of the most common reasons Bangladeshis borrow against property. But a renovation loan is not the same as a purchase loan. Lending rates move with the market and there are a few nuances to be aware of. Here is what to check before you sign.

The Do’s

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Do find out what the product is actually called. Many banks and financial institutions do not sell a standalone renovation loan. They fold repair, extension and finishing work into their regular home loan, sometimes with different terms. Ask the lender exactly which product applies to your work and what it is allowed to cover.

Do ask for the effective rate, not the advertised one. Housing loan pricing in Bangladesh is market based and floats. Ask whether your rate is fixed or variable, how often it can be revised, what it is benchmarked against, and what your instalment would look like if the rate rose by two or three percentage points.

Do sort out your ownership papers before you apply. Expect to produce the registered deed, an up to date khatian or porcha, mutation in your own name, and receipts for holding tax and land development tax. If the mutation is not done, no lender can accept the property as security, and fixing it after applying will cost you weeks.

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Do check your plan against your approved building plan. Any structural change, extension or vertical addition needs to sit within what the approving authority sanctioned. Work that deviates from the approved plan can sink the loan application and can also block an occupancy certificate later.

Do ask for the full schedule of charges in writing. Interest is only part of the cost. Ask about the processing fee, valuation, legal and documentation charges, mortgage registration, stamp duty, insurance and any early settlement penalty, then add them up before you compare lenders.

Do test your own repayment capacity first. Lenders calculate how much of your monthly income already goes to loan instalments and lend within that limit. Do the same sum yourself, including every existing instalment and card balance, before you decide how much to ask for.

Do ask about Shariah compliant options if that matters to you. Islamic banks and financial institutions structure renovation finance as co ownership or deferred sale rather than interest. The paperwork and the economics differ, so ask for a like for like comparison.

The Don’ts

Don’t assume the loan will cover the whole job. Lenders finance a share of the property value, and that share is often lower for renovation than for a purchase. Work out what you will need to fund yourself before you commit to a scope of work.

Don’t expect a lump sum in cash. Money is usually released in tranches against quotations, bills and verified progress on site. Since most contractors here work in cash, insist on itemised written quotations and keep every receipt, or your next tranche will stall.

Don’t budget at today’s material prices. Rod, cement and tiles have swung sharply in recent years. Build a contingency into your budget rather than discovering the gap halfway through the work.

Don’t borrow against a property that is already mortgaged. If it is pledged against an existing loan, you will need that lender’s consent or a formal takeover, which adds cost and delay.

Don’t skip the title and insurance questions. Jointly held, inherited or unclear title property can disqualify you outright, and lenders will usually require insurance on the mortgaged property.

Don’t assume the renovation pays for itself at resale. In a slow market, a costly upgrade may not return its price. Renovate for how you want to live in the home, and treat any resale gain as a bonus.