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Home additions: options, financing and insurance

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12.08.2021 | 3 minutes

Is your home starting to feel too small? If yes, there’s no need to order a moving truck just yet. A home addition will provide additional space and generally increase the value of your property. With good ideas and the support of experts, you’ll create a project to be proud of. We explain what you need to know if you decide to add on to your home.

Planning a home addition

A home addition is as complex a project as building a new house, at least in terms of the design. Prudence, thoroughness and the help of experts lead to the desired result. As the building owner, you need to be aware of the following basic points:

  • Construction permit and cost estimate: The addition will be planned by a professional architect. Qualified experts are trained to explore the scope based on boundary distances, building and zoning regulations. An architect compiles all the plans and documents that are mandatory for a building permit. The architect’s estimated budget gives you an initial idea of how much the addition will cost.
  • Financing: This needs to be clarified right at the start because this sort of project can get complex and costly. Do you have enough savings? Or are you thinking of increasing your existing mortgage? Clarify in advance what requirements you’ll need to meet.
  • Insurance: For a project of this size you’ll need to check whether you are sufficiently insured as the building owner, specifically whether you have private contractor’s and principal’s liability insurance. You also need to register the project with the cantonal building insurance (mandatory in most cantons). An addition generally increases the value of a property. The work completed must be reported to your insurance provider to prevent you from being underinsured.

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Below we explain the above factors in more detail regarding planning a home addition.

Obtaining a construction permit

You might think that a construction permit would not be required for a house whose initial construction was already approved. This is not the case, however, because the permit at that time was only granted for the house in its current form. A subsequent addition is subject to a new building permit process.

The framework is provided by the detailed building regulations for the zone in question or the building regulations of the municipality. An addition must meet a range of different building code requirements, energy laws, noise and fire safety legislation, and more besides. Depending on the property, preservation and historic building legislation may also play a role.

Perspective of a house on which an addition is being built
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Before you start imagining the finished project in your mind’s eye, you’ll need to consult the relevant authorities. Your architect will also be able to advise you as they will be responsible for submitting the planning application.

Choosing an architect

The architectural office will be your right hand during the project, checking all the structural conditions, developing a template for the addition according to your wishes and submitting the building application to the authorities. Ideally, contact the same architect who built your home. Recommendations from the neighborhood and from friends and acquaintances are also helpful. If you still don’t have any idea who to engage, consult a central database such as that of the Swiss Society of Engineers and Architects (SIA).

Financing

It sounds simple enough: if you want to invest in converting or adding on to your home, you need to know your budget. What financial resources have you thought of? Your own savings account, a loan, increasing your mortgage or applying for a public subsidy?

The costs of a home addition depend on a lot of different factors, above all its basic area and volume, the materials and method of construction and the work required to adapt it to your existing home. To clarify the budget and the overall costs in advance, you should seek advice from the architect or your construction partner. As soon as the key data are known – cost estimate, planning documents, project description – the appropriate financing solution can be worked out.

Financing through savings

For many private individuals, buying a home is the biggest investment of their lives. In the long term, owners must be able to pay for ongoing maintenance and ensure their home does not fall in value. You should be able to pay for your ancillary costs, periodic maintenance and minor work from your own savings or current income. To be prepared for any eventuality, most owners hold additional funds in reserve in an investment fund or savings account. You may already have enough savings to finance your project, or at least a substantial portion of it.

Increasing your mortgage

When it comes to a home addition, many homeowners contact their bank or mortgage partner because the costs can quickly exceed normal annual spending. The obvious thing to do is to add the cost to your existing mortgage. However, you need to be aware of two restrictions:

  • The “golden rule” of real estate financing still applies: The new total mortgage amount must not be more than 80 percent of the value of the property. For vacation properties, the loan-to-value ratio is 60%. The actual increase in value that the bank believes will arise is decisive. You’ll have more room for maneuver if you’ve already made some repayments and the current loan-to-value ratio is below 80 percent. You also need to demonstrate that a bigger mortgage is financially viable. After the mortgage has been increased, the ongoing costs for interest, amortization and ancillary costs must not exceed one third of your gross income (calculated with a long-term imputed interest rate).
  • You should be aware that your bank may review your overall situation. If the value of the property and/or your income situation has changed, a reassessment may occur. If you are over 55 or 60 years old, remember that the financing and the amount of the loan need to be affordable after you retire.

Withdrawing retirement savings

You are entitled to use your own pension funds (assets of the pension fund and pillar 3) to fund a home addition and any kind of major renovations and enhancements. Withdrawals are possible every five years, and the minimum amount is CHF 20,000. It is also imperative that you use this “cash injection” not for maintenance, but for value-adding investments. In the case of pension fund (PF) assets, remember that certain restrictions apply from the age of 50. However, in the five years prior to ordinary retirement, you can liquidate pillar 3a assets at any time. All withdrawals must be taxed, albeit at a reduced rate. Also note the following:

  • The property must be owner-occupied residential property (no vacation apartments or investment properties).
  • In principle, you have the choice of either withdrawing or pledging pension funds in advance. In the case of the latter, the amount in question is pledged to the bank. Most banks will loan a higher amount due to this security.
  • If you want to withdraw money that has already been pledged, this will require the consent of your bank. As with any mortgage increase, the bank will review your dossier again (financial affordability, maximum loan-to-value of 80 percent of the property value).
  • Think about your own retirement savings and financial security, especially if withdrawing monies from your pension fund: If you do not repay the amount, you will have to accept a lower pension later on. Depending on the pension fund and its rules, this could affect payments in the event of disability or death. Get advice and make sure you follow a plan.

Build an energy-efficient addition and apply for a subsidy

In practice, it is often the case that the project leads to further improvements, conversions and enhancements. Some will also renovate the building envelope or add their own roof-mounted photovoltaic system to the project. If the project improves energy efficiency and reduces CO2 emissions at the same time, you are entitled to financial subsidies in most cantons.

  • The building program is an important point of contact for funding during renovation measures. This institution, which is run jointly by the Confederation and the cantons, is committed to reducing energy consumption and CO2 emissions. The website Energiefranken.ch offers a search function for all funding programs throughout Switzerland based on the location of your property.
  • If you want to get an idea of your property’s energy efficiency, you should order a building energy certificate from the cantons (GEAK). The result is assigned to the categories A (very energy efficient) to G (low energy efficiency). Some cantons ask for this certificate anyway as part of subsidy applications. In some locations, a grant is also available for the analysis itself.
A room with wood-paneled walls. A mountain landscape can be seen through a large picture window.
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It’s good to know that you can deduct the cost of maintaining a property from your income tax. Most cantons publish a detailed catalog on their website of which measures are tax-deductible and which are not. The value-adding portion of an addition cannot be claimed here, but you should still keep all invoices and receipts. Your expenses can later be claimed for tax purposes in the event of any real estate gain.

In principle, the following applies: you can deduct the full cost of energy-saving investments from your taxable income at both federal and cantonal level.

Taking out and adjusting insurance

As soon as the financing has been finalized, you’ll want to start the project. But before contractors and craftsmen can get to work, you should check the necessary construction insurance. Are you sufficiently insured if something goes wrong during the work?

This mainly concerns principal’s liability insurance, construction insurance and coverage for fire and natural hazards.

Liability

Most personal liability insurance policies offer sufficient coverage for minor renovations and maintenance work in the case of private residential property. Homeowners are already sufficiently covered for this type of work. But for a construction sum of CHF 200,000 or 250,000, an additional principal’s liability insurance must be taken out (depending on the terms and conditions of your insurance).

Accidents can happen on any construction site. As the principal (building owner), you are liable for damage to third parties and third-party property. Contact your insurance company and, if necessary, request an assurance. Pay attention to the provisions in your policy. You may not be insured against delicate work on foundations or a lack of input from engineers or your insurance benefits could be reduced. Depending on the project, additional cover may make sense.

Construction insurance

Construction insurance is also highly recommended. This provides optimal coverage against damage to any parts of your house or property. For example, it would cover the damage if a water pipe breaks during drilling work. Construction insurance is a kind of “fully comprehensive insurance” for your property during construction work. It also covers vandalism or theft on construction sites.

Building insurance

In most cantons, building insurance against fire and natural disasters such as floods, storms, etc., is compulsory. As soon as a project exceeds a certain size, it must be reported to the responsible insurance company. In the canton of Zurich, for example, this is required if the increase in value is at least CHF 50,000.

Every conversion or addition makes the property more usable and contributes to a better quality of life. From a financial point of view, however, this is also associated with an increase in value. Before you furnish the new guest or music room or move into the new conservatory, there is another important point on the to-do list, which is to inform the building insurance company about your project. It is important that they know the difference between the previous and the new insurance value. If you do not have the insured amount adjusted, you would be underinsured in the event of a claim. As soon as this formality is behind you, you can start enjoying your additional living space.

Summary: don’t move, add on

Do you like living in the home you’ve bought, but would like more living space? You don’t necessarily need to search for a new place to live. Check whether you can’t just add on to your home. Whether to the rear, to the side, upwards or in solid or prefabricated construction – there are lots of options. Despite the excitement of a potential construction project, it’s important to keep an eye on the financing and the necessary insurance at an early stage.

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