Construction deposit accounts

What is a construction deposit account?

A construction deposit account is a special, blocked account within which you reserve an amount for scheduled renovation work or a new-build property. The construction deposit account is part of your mortgage. From the construction deposit account, you pay the invoices for renovation work and materials. 

How does a construction deposit account work?

Are you buying a fixer-upper or a new-build home? If so, then in most instances, a construction deposit account is set up with your mortgage. The amount you withdraw from that construction deposit account is determined by two factors:

• The work you are looking to have carried out
• The value of your home (before and after renovation work)

Once your mortgage term commences, the lender will deposit the amount into a blocked account. During the construction or renovation of your home, you declare the invoices for these works to the lender.

The construction deposit account ends when your construction or renovation is finished or after a certain period. Often at that time, the entire amount from the construction deposit account will have already been used, but there can be instances when there is an amount left over. That remaining amount will then used towards repayment on your mortgage.

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How can I transfer money from the construction deposit account?

You can pay invoices for the construction or renovation by filling in a special form from your lender (often online). Some lenders even have an app you can use for this purpose. You can usually choose whether the amount should be transferred to your own account, or directly to the building contractor/supplier. 

When is a construction deposit account compulsory with a mortgage?

For renovation works
Did the appraiser take renovation work into account when determining the property’s market value? If so, then a construction deposit account is compulsory.

The valuation report includes the current market value and an estimated market value after renovation. By keeping the money for the renovation in a deposit account, the lender is certain that the renovation work will actually go ahead, and that the market value will be achieved after the property’s renovation.

However, you can also finance the renovation using your own capital. Check out the pros and cons of both options here.

Please note: your lender will only take into account the market value after renovation if there is a construction deposit account. If you do not apply for a construction deposit account, the lender will work with the market value before renovation.

For new-builds
In the case of new-builds, a construction deposit account is compulsory. The contract price and any additional work are included in the construction deposit account as standard.

What are the costs of a construction deposit account?

You do not pay any extra commission fees for a construction deposit account with your mortgage. However, the monthly costs of your mortgage are affected: your total borrowing amount is increased, so your monthly payments will be higher.

Interest on the construction deposit account

You will receive an interest payment (from most lenders) on the amount that has not been withdrawn from the construction deposit account. This interest is offset with any mortgage interest you might owe.

As long as the full amount is still in the construction deposit account, you will therefore only pay the repayment sum on your mortgage, and no interest just yet on balance. As soon as money is taken from the construction deposit account, you will no longer receive any compensation for that part. Your monthly payments will then increase because the interest payment will no longer be added. Your monthly payments therefore depend on the moment that you take money out of your construction deposit account.

Keep in mind, that with annuity and linear mortgages, your repayment is due on the entire loan – including the construction deposit account – from the start, even if you are starting building work at a later stage.

What are the conditions for a construction deposit account?

The conditions for the construction deposit account vary per lender. Therefore, always read the mortgage offer and terms and conditions carefully. In general, these are the points to consider:

• The duration of a construction deposit account can vary considerably. In general, it’s between 6 months and 2 years. If you are buying a new-build home, or you are not planning to renovate immediately, it is therefore useful to opt for a construction deposit account that runs for a long time.
• The interest payment on your construction deposit account is often equal to the interest on your mortgage, but in some cases, this can be one percentage point lower.
• Make sure there is an easy way to submit your claims. With most lenders you declare your invoices online, or via an app.

How do I set up a construction deposit account for my situation?

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