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Mortgage advice… the options in Spain


Tropicana can help you source a mortgage with a Spanish bank that best suits your requirements and your needs. As more and more people continue to look to buy a property in Spain and consider taking out a mortgage then with a Spanish bank to finance the purchase it is important first to understand some of the differences that exist for foreign buyers in Spain. Given the present credit controls imposed by many lenders in Europe over recent years, then you should expect to supply not only proof of income(s) but also in certain cases the lender may ask you to provide a statement of your current credit exposure too. Further, since Spanish banks are far more reluctant to lend money against rural (campo) country properties in favour of urban properties - generally speaking, after an independent valuation and full credit analysis, the few Spanish banks lending today will only offer a maximum of 70% on an urban property as against just 30% or even less on a rural property.

Taking a mortgage with a Spanish bank or lender can offer certain advantages, such as low interest rates, favorable write off conditions [#1], easier for taxpayers to sort out taxes, reduced bank commissions, etc. In recent years, as the number of foreign buyers has continued, then the Spanish lending banks have tried to develop this market and it is worth shopping around to see which options best suit you. Services to look for should include location to your second home, flexible banking, language support, low interest rates, personalised customer services, efficient, secure and accessible online banking, etc.

Arranging your Spanish mortgage early on can save you money and give you greater bargaining force when making that offer on a property for sale. It is well worth investigating the options available in advance of your trip to ensure that you know exactly how much you need to borrow (including those extra costs). Taking steps to arrange your Spanish mortgage at the start will also mean you will have a better idea of how much you can spend on your Spanish property and can also give you a better idea of the financial implications of your purchase. Finally being this prepared also means that you reduce the risk of losing the property that has cost you so much time, effort and travelling to find.

As in other EU countries the majority of mortgages sold in Spain (to both Spaniards and Foreigners) are variable rate, and consequently the mortgage repayments vary according to the base rate set by the European central bank; i.e.: the Euribor [#2]. With this type of mortgage if the interest rate falls you pay less, but if it increases then you pay more. Therefore it is essential that you have the e-banking facility with your lender so that you can monitor these fluctuations.

Most financial institutions are also able to offer other products that may suit you best. A fixed rate Spanish mortgage will tend to have higher interest payments in the short term and if interest rates rise then the holder may end up paying less than by variable rate; but at the same time you know the exact mortgage repayment values per month. A mixed mortgage involves a certain period (ie 5 years) of fixed interest payments, and a floating rate after that initial period. Some Spanish lenders have started to offer interest only mortgages to help existing lenders and to help promote the market since the "crisis". The borrower only pay’s the interest on the loan in their repayments, agreeing to return the capital at the end of the mortgage or at some point during the contract. This product could be of special interest to foreign investors who plan to rent out their Spanish property to cover the mortgage costs and are not intending to keep the property for more than 10 years. For those considering this option then please consider that since 2016, the Junta de Andalucia has introduced a new scheme to organise and manage the suitability of such properties to safeguard tenants and owners alike - see Note [#1] below.

A further trend with Spanish mortgage lenders has been to increase the lifetime of the contract, depending upon the age of the borrower, so that instead of periods of 10 to 20 years now most will offer 25 years or longer (depending on your age at the time of application). The effect on the home market is to reduce the size of monthly mortgage repayments and also to stimulate demand for property and make it more accessible to a wider market.

Spanish mortgage companies recognise that in most cases, borrowing for a Spanish holiday home is a slightly riskier loan than borrowing for a primary residence. They assume that if you fall on hard times then financially you are more likely to default on your holiday home than to lose your primary residence. Generally speaking Spanish lenders prefer not to lend more than 60% to 70% of the Spanish urban property value to foreign (non-resident) owners. This is because they are aware of the additional risks like language, transparency of information, and reliability of fiscal information can frustrate them. With the world recession, attitudes have changed, and in some instances Spanish lenders are even more cautious to lend - especially if you already own a property in Spain that is mortgaged. Hence, lenders are no longer afraid to ask for a full credit exposure check, a limit of 60% finance, and more lenders now will only offer on the actual purchase price rather than the independent valuation of the property (even though this will still form the loan base). More recently, we have seen a bank valuation on a property exceed 200,000 Euros but because the offer and purchase price was only 148,000 Euros; this left the buyer having to find both the 30% deposit from other sources plus the taxes and registration fees required for both the property and the mortgage. We have also seen a greater reluctance by lenders to offer any or part finance on rural properties. Today, if you are non-resident in Spain and already own a Spanish property with part financing then you will find it extremely difficult to raise similar financing to purchase a second property.

Brief explanation of routine Spanish mortgage costs…

The Property Valuation – prior to granting a mortgage a Spanish lender will require that the property be valued by an independent accredited valuation company. It is usual that the applicant pays the costs of this valuation that can be anything between a few hundred Euros to over a thousand Euros depending upon the value and size of the property. This usually takes between 2 to 4 weeks before you get notification.

Land Registry Fee - a Spanish mortgage lender, like your lawyer, will insist on seeing a nota simple (land registry deed extract) that is up to date and confirms that the property does not have any other unexpected debts attached to it.

Opening Fee - Spanish mortgage lenders charge a fixed fee for setting up the mortgage costs, and this is typically 1% of the value of the mortgage, but can range from 0.5% to 2%. It is important therefore to know these costs in advance of the offer.

Mortgage Insurance - there are three kinds of insurance you have to consider when arranging a Spanish mortgage. The first, a general house and contents insurance is a legal requirement of Spanish mortgages and the lender must appear as the beneficiary of the property insured. The amount of insurance required is established from the valuation, and the insurance value will not be the same as the value of the property. The insurance value is the amount required to rebuild the property and will not include the land value because it would still exist. The other two kinds of insurance are life insurance and mortgage insurance. In both cases insurance is not mandatory as is the case for house and building insurance, however it is worth considering these additional covers as not only is it important to have appropriate cover but it will help when negotiating better conditions from the Spanish mortgage institution. Insurance costs will be based on your age and the loan amount and may vary from bank to bank. Nevertheless it is often the case that Spanish insurance cover is much cheaper than in other countries.

Notary Fee – when a Spanish mortgage is secured against a Spanish property then this together with the deed for the property has to be declared before a Notary. Generally speaking the Notary fees will be based on the number of clauses and explanations in the deed – with a mortgage deed having approximately the same number of clauses as the purchase deed. Therefore on average you will need to budget the double cost of the Notary fees; say from 400 Euros to 800 Euros.

Land Registry Fee – as with Notary fees, having a mortgage on a Spanish property (where the mortgage is regarded as a debt against the property) this too will be registered with the land registry. Therefore there will be a small increase in the land registry fees and again this will be about the same as the fee for registering the property.

Stamp Duty (AJD - actos jurídicos documentados) – is a tax paid to the government and is calculated as a percentage of the value of the Spanish mortgage. The amount can vary from region to region, age status, and can also vary according to the amount of the mortgage. The form used for this declaration is the model 600 and here in Granada the average non-resident buyer can expect to pay 8%.

Deed Arrangement Fee – is a charge payable to the company (gestoria) who arrange for the deeds to be inscribed correctly in the local land registry. Banks and lending institutions usually do this as part of their provision of funds allowance required from the borrower, they will insist on using their chosen gestoria as they will need to be absolutely sure that both the property and the mortgage have been properly registered. This cost is normally around a couple of hundred Euros. [#3]

Early Cancellation Fee – see Note [#2] below… traditionally Spanish mortgage lenders discourage early settlement or cancellation and therefore will impose fees of up to 1% of the value of a Spanish mortgage. However in order to encourage more short term borrowers, Spanish legislation reduced the fees charged by lenders to assist the continuation of buyers for Spanish property.

Partial Cancellation Fee – like early cancellation so too partial cancellation will often incur a financial penalty relative to the amount paid back early. In such instances it is worth consulting with the lender directly before committing to the mortgage agreement.

Subrogation Fee – when a Spanish property, such as a new build where the developer has secured Bank financing for the properties, offers a mortgage secured against then it is sold with a mortgage that can be either cancelled or taken over by the new owner. This is known as subrogation and can also apply to second hand purchases too; after full credit checks have been carried out. The subrogation fee is normally paid by the new owner, and is usually lower than the opening fee for a new mortgage (0.5% instead of 1%). When you are offered the possibility to subrogate a Spanish mortgage it is important to bear in mind that subrogating this Spanish mortgage means continuing with the existing mortgage conditions i.e. period and interest rate. These may not be the best to suit you in the Spanish mortgage market. However all the set up costs (Notary, Registration and taxes) are lower.

Interest Payments – monthly mortgage repayments for Spanish mortgages will comprise partly of capital repayment and partly of interest on the loan (unless you have an interest-only mortgage, which while rare in Spain is becoming more popular among foreign buyers). From early on the mortgage repayments will show that the interest payments, rather than capital, will be the larger of the two amounts. However over time the interest payments will decrease in relation to the capital repayments. Interest payments are calculated using the base rate set by the European central bank (Euribor). See below NOTE [#3]. Most Spanish mortgages have a fixed rate only for the first period – usually year 1 – before moving on to a variable rate of Euribor + x%; and where 'x%' is the lender's margin on the loan. This can vary widely between the institutions and also in relation to the “risk” of the borrower. Generally speaking the charges currently offered vary between 0.75% and 2.5% for variable rate loans.

Capital Repayments - on a standard Spanish mortgage such payments take place monthly with the amount repaid depending on the loan duration. The more years you have to pay off the principal amount then the lower the monthly repayments in relation to the size of the overall mortgage. Taking out an interest only Spanish mortgage means that you will not start paying back the capital until much later; i.e.: for instance after 10 years or even to the end of the mortgage period. An interest-only Spanish mortgage is usually advantageous for those who are either looking to purchase a property for rental income (where the income raised can contribute all or part of these lower mortgage re-payments), or who expect to release capital from other sources in the next years and to pay off the loan completely without too much financial layout in the early years.

NOTES:

[#1] In order to offer a property for seasonal/holiday lettings the property has to be registered with both the local and regional office of tourism. These new regulations came in to force in May 2016. Non compliance carries fines in excess of 6000 euros, but this will not be enforced until later in 2017.
The new law affects those owners who offer their Spanish property on the rental market (via websites/third parties/specialist agents) and such owners have 3 months from the publication of the decree (May 2016) to register their property with the government of Andalucia as a holiday rental in their register of properties available for holiday business.
There are several conditions that have to be established before owners are allowed to offer their property on the seasonal rental market and these include:
A registration document that will indicate the size of the property, services, name and address of the owner, contact details of managing agent if applicable, etc. These are the details you need to be initially registered, to obtain a “property number” which will then have to appear in all advertising and this includes published websites.
The property will also have to have a license of first occupation and a document of habitation/occupation that is recognised by the issuing authorities. Here the town hall has been working with local technical architects to assist them in the preparation of the documents required, at an average cost to owners of between 600-800 euros, and which includes all documentation, certificates and the registration with local and regional authority.
Owners of such properties will also have to publish the terms, rates and conditions of reservation (xx% at the booking, form of payment, refund cut off, etc…)
Local Information for police, health, tourism, etc
Provide that the furniture, fixtures and fittings are to be kept in good condition
The property will have to be clean when the tenants arrive
Air conditioning/Heating installed (obligatory from May 2017) so that all rooms can be heated/cooled to a mean of 19º C
Bedding, towels, etc… plus a spare set available (depending on the length of stay)
Official Complaint forms book
Telephone contact details of the owner and the person who manages the property
A kit for first aid, smoke detector and fire extinguisher
All the rooms will need to have a window or ventilation.

These regulations do not apply to long term rentals – ie 12 months to 3 year furnished housing rental,  because they come under a different protocol to protect both tenant and landlord rights. However the main reason is for tax authorities to monitor incomes gleaned from holiday and long term rentals by resident and nonresident owners alike.
 
[#2] The cost of changing or cancelling a mortgage in Spain varies from 1% to 0.25%. Most banks are open to negotiate the charge if your custom has been loyal and you have made regular payments. The cost of cancelling an average mortgage of 150,000 Euros at 27 years could be less than 500 Euros.

[#3] Concerning the planning of a variable rate mortgage that is essentially based on the Euribor rate a useful guide to movements can be found at http://www.euribor-rates.eu/

[#4] Once you have agreed to the terms and conditions of your Spanish mortgage provider then soon after you will be asked to deposit a provision of funds that will cover all the fees and costs that the lender will require to register the property at your name. This provision will allow for the legal, Notary, land registry, transmission taxes and arrangement fees for the property. As a consequence the lender will arrange many of the tasks that your legal agent would do on your behalf. But you should also realise that in having a mortgage you will now have two deeds to be notarised, registered and paid for; thus increasing general purchase costs by a further 800 to 1,500 Euros.

Edit: 08.2017