SPANISH MORTGAGE

Introduction

Our experience of the Spanish property market has shown us that Spanish mortgages are a common area where overseas buyers of Spanish property pay more than they need to for lack of insight into the market.

Please always remember the following when using a mortgage to finance the purchase of Spanish property:

1. Your property in Spain is at risk if you do not keep up repayments on a mortgage secured on it.
2. Be sure you understand the repayments and can afford them before entering into any credit agreement.
3. The value of Spanish property can go down as well as up.
   

Arranging your Spanish mortgage early on saves you money

If you are serious about buying a property in Spain then you should start arranging your Spanish mortgage almost before you do anything else. Leaving the financial side of your Spanish property purchase until the end does you no favours whatsoever. If you leave it too late, and have to arrange your Spanish mortgage in a rush and under pressure, it is likely that you will get an expensive and inflexible Spanish mortgage. And never forget that Spanish mortgages run for many years so you will have to live with the consequences of you decision for years to come.

The advantages of arranging your Spanish mortgage at the start of your property search are:

1. It costs you nothing to start early.
2. Forward planning helps you clarify the advantages and disadvantages of taking out a mortgage in Spain and make the best decision as to how much, if at all, to borrow.
3. Arranging your Spanish mortgage in good time allows you to find the mortgage in Spain that best suits your requirements and avoid overpaying.
4. By taking steps to arrange your Spanish mortgage at the start you will have a better idea of how much you can spend on your Spanish property and can work out the likely future financial implications of your purchase.
5. Having your Spanish mortgage in place reduces the risks of you loosing a Spanish property that it has cost you so much to find, and means one less source of anxiety and pressure when you are trying to close on a Spanish property.
   

An overview of the Spanish mortgage market

Just like any advanced economy Spain has a developed mortgage market with a number of lenders offering a great variety of Spanish mortgages. Mortgages in Spain are offered by banks and savings banks (know as Cajas in Spain) and sold either directly by the lenders or through mortgage brokers. Several international banks, including British banks like Barclays and Lloyds TSB, offer mortgages in Spain alongside the national banks and cajas.

And just like any other developed mortgage market there are big differences in the costs and terms of the Spanish mortgages on offer, ranging from inflexible and expensive mortgages to cheaper and flexible ones. Although the interest charged on all Spanish mortgages is calculated as a function of the base rate set by the European central bank, beyond that mortgage lenders in Spain are relatively free to set the charges and terms of the Spanish mortgages they offer. This translates into significant differences between Spanish mortgages in terms of their costs and conditions. Not only do Spanish mortgages vary in their attractiveness from bank to bank, they also vary considerably within the same bank, and even from branch to branch.

With so many potential lenders, many of which who do not market their Spanish mortgages to foreign buyers, it is difficult if not impossible for foreigners to find the best deals on the market. However if you don't shop around, or use a broker who shops around for you, it is highly likely that you will end up with a relatively expensive and inflexible Spanish mortgage that will cost you thousands of Euros more than you need to pay over the lifetime of the mortgage.

Types of mortgages in Spain

As in other countries such as the United Kingdom the vast majority of mortgages sold in Spain (to both Spaniards and Foreigners) are variable rate mortgages. This means that mortgage repayments vary according to the base rate set by the European central bank. Borrowers with variable rate Spanish mortgages cannot be certain what their mortgage payments will be in the future. If the interest rate falls they will pay less, but if it rises they will pay more.

Most lenders also offer a fixed rate Spanish mortgage. These Spanish mortgages tend to have higher interest payments in the short term but if interest rates rise a fixed-rate Spanish mortgage holder might end up paying less than would be the case with a variable-rate Spanish mortgage. At the very least they give borrowers the ability to know exactly what their mortgage repayments will be for a set time into the future.

Some Spanish mortgage lenders also offer a mixed mortgage that involves a certain period (for instance 5 years) of fixed interest payments, and a floating rate thereafter.

And recently some Spanish mortgage lenders have started offering an interest only Spanish mortgage under which borrowers only pay interest on the loan in their mortgage repayments, and then return the capital either at the end of the mortgage or at some point in the future during the lifetime of the mortgage. This kind of Spanish mortgage can be very interesting for foreign investors who plan to rent out their Spanish property to cover the mortgage costs and do not plan to hold their Spanish property for more than 10 years.

Recently Spanish mortgage lenders have increased the lifetime of mortgages that they are prepared to lend (depending upon the age of the borrower). Where as in the past most Spanish mortgages were for between 10 and 20 years now most lenders offer mortgages of 25 years or even longer. Longer Spanish mortgages reduce the size of monthly mortgage repayments and therefore stimulate demand for Spanish property by making it accessible to a wider market. This fact, along with the reduction of interest rates to historical lows and the number of foreigners buying property in Spain, have been primary drivers of the Spanish property boom in recent years.

How do Spanish mortgage lenders price their mortgages?

Spanish mortgage lenders will decide how much to lend you and on what terms according to your personal and financial profile. They will want to know how much you earn and what your other financial commitments are (your personal balance sheet - assets and liabilities). As a general rule of thumb they will lend according to earnings multiples whereby your Spanish mortgage repayments will not exceed 35% of your net annual income. However if they think you have excellent career prospects and that your income is very likely to increase in the future (something that you would have to convince them of) then they may be prepared to lend you more. Also the younger you are the more they may be prepared to lend you (all other things being equal) because they assume that you have a longer working life in which to pay off your mortgage in Spain.

They also take into account what kind of a property you want to buy. If you are borrowing for a Spanish holiday home they will consider this a more risky loan than if you are borrowing for your primary residence. This is because they assume that if you get into financial distress you are more likely to default on your holiday home rather than your primary residence.

In general Spanish mortgage lenders don't like to lend more than 60% to 70% of the value of the property to foreign buyers of Spanish property. They consider foreign mortgage applicants as awkward because their risk profile is harder to gauge than for Spanish clients, and because language can often be a barrier (most of the documentation that lenders prepare is in Spanish). Nevertheless this is starting to change as Spanish mortgage lenders realise how important foreign buyers of Spanish property are and how big the market is. And in the meantime a good Spanish mortgage broker can get foreign buyers a Spanish mortgage with a loan-to-value of up to 80% (depending upon the circumstances of the applicant), with the lowest costs on the market and most flexible terms. This is partly the case when Spanish mortgage brokers specialize in foreign buyers, because this experience helps them to quantify the risks on behalf of the Spanish mortgage lender. This changes the attitude of the lender from 'I don't understand foreign clients so I won't lend much and I'll make it expensive just in case' to 'This mortgage broker has given me a very good idea of the creditworthiness of this client so I'm going to lend the client the amount needed and on good terms'. A good Spanish mortgage broker also removes the language problem as they interface between borrower and lender and provide both sides with all the information then need in their respective languages.

Spanish mortgage costs explained

Property Valuation
Before granting a mortgage a Spanish lender will require that the property be valued by one of their appointed valuation companies. This can cost anything from a few hundred Euros to over a thousand Euros depending upon the value of the property. The person applying for the Spanish mortgage has to pay this cost.
Land Registry Fee
Before a Spanish mortgage lender will grant a loan on a property it will insist on seeing a nota simple (land registry filing) that confirms that the property does not have any other unexpected debts attached to it. However you (or rather your lawyer) will need to request a nota simple from the land registry for your own sake so this can be considered a non-differential cost that you would face with or without a Spanish mortgage.

Opening Fee
Most Spanish mortgage lenders charge a fixed fee for setting up a mortgage. This is typically 1% of the value of the mortgage, but can range from 0.5% to 2%.

Mortgage Insurance
There are three types of insurance to consider when arranging a Spanish mortgage. The first is a general house and contents insurance. This is a legal requirement of Spanish mortgages and the lender must appear as the beneficiary of the house insurance. The amount of insurance required will be established by 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, clearly that will not include the value of the land as that would still exist. The other two types of insurance are life insurance and mortgage insurance. In both these cases insurance is not mandatory (as it is for house/building insurance), however it is worth considering them as not only is it important to have appropriate insurance cover but it will also help when negotiating better conditions for your Spanish mortgage. The costs of the insurance is based on your age and the loan amount and can vary from bank to bank.

Notary Fee
If a Spanish property has a mortgage secured against it this has to be declared before a Notary. Notary fees are based on the number of clauses in the deeds and a mortgage deed will have approximately the same number of clauses as a purchase deed. The notary will charge for this and therefore a Spanish mortgage increases the Notary costs at the time of signing the public deeds of sale.

Land Registry Fee
Likewise the existence of a mortgage on a Spanish property (the mortgage is seen as a debt against the property) must be registered with the land registry. This slightly increases the land registry fees when buying property in Spain. The fee for registering a Spanish mortgage is approximately the same as the fee for registering the property.

Stamp Duty (AJD)
This is a tax paid to the government and is calculated as a percentage of a Spanish mortgage. The amount can vary from region to region and vary according to the amount of the mortgage.

Deed Arrangement Fee
This is a fee payable to the company (gestoria) who arrange for the deeds to be inscribed correctly in the local land registry. Lenders will normally insist on using their chosen gestoria as they need to be absolutely sure that both the property and the mortgage have been properly registered. This should not be more than a couple of hundred Euros.

Early Cancellation Fee
Spanish mortgage lenders do not like it when a client cancels a mortgage early (for instance if they have found a cheaper mortgage). Therefore they often impose a cost on early cancellation. It is common to find early cancellation fees of 1% of the value of a Spanish mortgage, though a good broker can find you a Spanish mortgage with little or no early cancellation fee. From the client's perspective a Spanish mortgage without this fee is preferable as it makes the Spanish mortgage more flexible.

Partial Cancellation Fee
Some Spanish mortgage lenders try to penalise clients who pay off part of their mortgage early. This is known as partial cancellation and will often carry a financial penalty related to the amount that is paid back early.

Subrogation Fee
If a Spanish property that has a mortgage secured against it is sold the mortgage can be either cancelled or taken over by the new owner (known as subrogation). The subrogation fee is usually paid by the new owner and is typically lower than an opening fee for a new mortgage (0.5% instead of 1%). If you are offered the possibility of subrogating a Spanish mortgage it is important to bear in mind several factors:

1. subrogating a Spanish mortgage means continuing with the existing mortgage (that means the same conditions i.e. period and interest rate). In doing so you might not be taking over the best terms available to you in the Spanish mortgage market.
   
2. On the other hand all of the set up costs; Notary, land registry and taxes, are lower.

Interest Payments
If you have a Spanish mortgage you will find that your monthly mortgage repayments are comprised partly of capital repayment and partly of interest on the loan (unless you have an interest-only mortgage, which are still not very common in Spain). At the beginning of the mortgage the interest payments will be the larger of the two, but as time goes buy and you pay down the principal of the loan the interest payments will decrease in relation to the capital repayments. Interest payments are calculated as a function of the base rate set by the European central bank (Euribor). Some Spanish mortgages have a fixed rate for the first period - say the first year - and then go on to Euribor +x%. The 'x%' is the lender's margin on the loan, and this will vary according to lender and client. In general the margin that Spanish mortgage lenders charge varies between 0.75% and 2.5% for variable rate loans.

Capital Repayments
Capital repayments on a standard Spanish mortgage take place on a monthly basis and the amount depends upon the lifetime of the loan. The more years that you have to pay off the principal, the lower the monthly repayments in relation to the size of the overall mortgage. If you take out an interest only Spanish mortgage then you will not start paying back the capital until much later on (for instance after 10 years or at the end of the mortgage lifetime). The advantage of an interest-only Spanish mortgage is that monthly mortgage repayments in the short term are low. However you are not paying down the principal over time, and need to be prepared to return the capital in its entirety at the appropriate time.

Is a Spanish mortgage a good idea?

For most people there are good reasons for financing at least a part of a property purchase with a mortgage. Advantages include the added legal due diligence conducted by the bank, and smaller ‘wealth tax’ (patrimonio) payments, though there are also costs associated with taking out a mortgage, as was explained in the previous section. At a time like this, with Euro-zone interest rates still low by historical standards, it can also make sense to use a Spanish mortgage just to take advantage of the cheap cost of borrowing.

In this scenario you borrow from the bank at low real (after inflation) interest rates, and if the value of property in Spain rises, as it has done most years in the past (though not necessarily in the future), you profit from all the capital gains. In the meantime you have your own funds invested in other assets earning you a return.

The ‘cheap money’ argument in favour of taking out a mortgage in Spain (even if you have the money to buy without a mortgage in Spain, for instance by equity release from a property in the UK) depends on prevailing interest rates, and the differential between UK mortgage rates and Spanish mortgage rates.

Lastly, you should always work on the assumption that interest rates will go up at some point, and be sure that if they do, you will be able to cope with the financial consequences. To put it another way, don't borrow more than you can cope with if interest rates rise - and they are sure to- especially if you are relying on rental income to cover your financing costs (your rental assumptions are another source of uncertainty that you need to evaluate carefully).

Should you use a Spanish mortgage, or a mortgage on your property at home?

There are various good reasons for using a Spanish mortgage as opposed to a mortgage taken out on a property at home (in the UK, for example).

It makes sense to have the asset (the property) and the liability (the mortgage) in the same currency. This helps to minimise one source of uncertainty and risk (the Euro-Sterling exchange rate).

If you plan to rent out your property, and use the income to help finance the mortgage, then it makes sense to have you monthly mortgage repayments in the same currency as your rental income.

The interest rates on Spanish mortgages at present are lower than on British mortgages, and are expected to remain lower for the foreseeable future. This means that monthly mortgage payments are likely to be lower with a Spanish mortgage.

On the other hand, Spanish mortgages have higher set-up costs than mortgages in the UK, what with all the notary fees, registry fees, taxes, and other administrative costs described in the previous section on Spanish mortgage costs. So if you only need a mortgage for a few years, it might make financial sense to use a mortgage taken out in the UK.

On balance, and especially under the present economic circumstances, most people will be better off taking out a mortgage in Spain, rather than using a mortgage on a property elsewhere to finance the purchase of a property in Spain. This might not be the case for everyone who wants to buy a property in Spain.

The risk of overpaying for Spanish mortgages

The Spanish mortgage market can be confusing, and bewildering. There are lots of lenders offering many types of mortgages that are difficult to compare because they have different cost structures and terms. Furthermore, the relatively complexity of mortgages as a product mean that you practically have to be an expert to unravel the small print, identify the hidden costs, and spot the best deals. In this respect the Spanish mortgage market is no different to other developed mortgage markets - where many people also pay more than they need to for mortgages. However, the fact that we are talking about Spain, where the language is foreign and things are done a bit differently, means that it is even more difficult to get at the best mortgages.

And there is one undeniable truth that applies to all mortgage markets: if you let a mortgage lender sell you an expensive and inflexible mortgage, they will. After all it is in their interests to do so (they will make more money).

So, for many Spanish mortgage lenders overseas clients are an easy touch. Although many lenders consider foreigners to be awkward clients (they don't speak Spanish, and it is difficult to gauge their creditworthiness) they are also lucrative clients, because they have less insight into the Spanish mortgage market, and are easier to sell expensive and inflexible mortgages with high margins.

Most overseas borrowers don't have the time, the language skills, the negotiation skills (in a Spanish context) or the understanding of how the Spanish mortgage market works to get the best mortgages on the market. In many cases an overseas buyer will only ask for one mortgage quote, probably from the bank or broker recommended by their estate agent (never a good idea) and then take it. This is not the way to get the Spanish mortgage that best suits your requirements at the best price. It is also the reason why most people may more than they need to for their Spanish mortgage.

A word of warning on 'bundled mortgages'. These are mortgages offered with properties sold off-plan by developers. Buyers are given the option of taking over the developer’s mortgage (an option known in Spanish as ‘subrogar’), potentially saving money on mortgage set-up costs. This may be a good solution, but buyers should also be aware that this is sometimes a way of selling expensive and inflexible mortgages to unwitting buyers. Buyers are not obliged to accept a bundled mortgage when buying off-plan on a new development, and are advised to at least check if there is a better mortgage available. Note that developers in Spain often save mortgage cancellation costs when buyers take over their mortgages, which is why they often put pressure on buyers to do so. It is illegal for developers to pass on mortgage cancellation costs to buyers, though that doesn’t stop many of them from trying to do so.

Spanish Mortgage Brokers

If you need a mortgage in Spain you will want to get the ‘best’ mortgage for you; the mortgage that best suits your requirements, with the most flexibility, and at the lowest possible total cost over the lifetime of the mortgage (not just the up-front cost). In other words, the cheapest and most flexible Spanish mortgage that you can get, taking into account your financial circumstances.

As mentioned in the previous section, there is a bewildering selection of mortgages available in Spain, all with their own costs and benefits, so you have to invest a lot of time and effort into finding a mortgage if you want to get the best one for you. Not being in Spain, and the language barrier, can make it even more difficult for many English-speakers to get a good mortgage in Spain.

For many English-speakers the best solution is to use a good mortgage broker specialising in Spanish mortgages.

A good broker starts by helping you to define your mortgage needs - something that many banks fail to do. It is impossible to get you the mortgage that best suits you needs at the lowest cost without helping you to define and understand exactly what your mortgage needs are.

In the process of helping you define your needs, a Spanish mortgage broker should also evaluate your creditworthiness. An accurate idea of how much debt you can cope with will help a mortgage broker select the right mortgage product for you, and negotiate the best terms with the lender on your behalf.  It is important that you do not take on a mortgage that is bigger than you can manage, and a good Spanish mortgage broker can help you avoid this.

In this consultation period a Spanish mortgage broker can also give you valuable mortgage advice. Experienced Spanish mortgage brokers have helped many other foreigners to get a Spanish mortgage, which gives them valuable experience that you can benefit from.

Spanish mortgage brokers work with many or all of the mortgage lenders in Spain, and should know all about the products on offer. Good brokers know how to interpret the small print, and identify the hidden costs that you might not be wise to. They know which banks are offering promotions and special deals in order to meet monthly targets or gain market share. And they know when and where pressure can be applied to negotiate the best terms for you (people are often surprised to discover that even branch managers of large banks are willing and able to 'cut a deal' if the negotiations are correctly managed).

Mortgage brokers also use their reputations with lenders to leverage the best deal for their clients. Spanish mortgage lenders appreciate the work mortgage brokers do in bringing them overseas clients - clients that those lenders would have difficulty in assessing on their own. Mortgage lenders appreciate the fact that mortgage brokers break down the language barrier between client and lender, and in some cases they also appreciate the volume of business that these brokers bring them. All of these things: business volume, convenience for lenders, reduced risk for lenders, and the market insight of knowing where the best deals are at any particular moment, mean that clients can benefit from using a good, professional, experienced Spanish mortgage broker.

Foreign buyers of Spanish property who take out a mortgage in Spain to finance their purchase should never forget that even small differences in mortgage terms could have a big impact on costs over the lifetime of the Spanish mortgage. Half a percentage point may not seem that important on paper in the exciting process of buying a Spanish property, but over the years the excitement will wear off, but the costs will not. Keep this in mind during the process of selecting a Spanish mortgage. This is the kind of small detail that makes a big difference that a good Spanish mortgage broker should ensure is taken into account.

Summary of the service that good Spanish mortgage brokers can offer:

1. Helping you with each and every aspect of arranging a mortgage in Spain. They explain the documentation required, what is going on at every stage of the process, and provide you with the information you require in a language that you understand. They also give you forewarning well in advance of key deadlines.
2. They give you insight into the 'total' cost of the mortgage. This means explaining to you all the costs you will face over the lifetime of the mortgage, and how these costs might change with the overall economic environment (for example changes in inflation and interest rates).
3. Advice on the best mortgage for you given your requirements today and in the future.
4. Advice on remortgaging your Spanish property or equity drawdowns.

On the other hand....

For most expats in need of a mortgage in Spain, using a specialist broker is the most sensible option. But using a Spanish mortgage broker has a cost, and is not the only option.

A good broker should make your life much easier, save you bundles of time, and get you the best deal, saving you stress in the short run and money in the long run. But you do have to pay the broker’s fees, and not all brokers are worth their fees.

Many people have now set up as mortgage brokers in Spain, and many of them do not have the knowledge or experience to justify their fees. They do little beyond introduce you to a local bank, and push mortgages that pay the highest commissions, not the best mortgage for you.

Some of the British and Irish people claiming to be specialist mortgage brokers in Spain are in fact just fraudsters taking advantage of expat buyers. Be particularly wary of people offering 100% (or more) mortgages, and demanding up front broker fees.

A good Spanish mortgage broker can provide a great service, but if you have a good credit profile, and you can afford to spend some time researching Spanish mortgages, then you may not need to use a mortgage broker. You can save yourself the broker’s fee of between 0.5% and 1% or more of the value of the mortgage by going direct to lenders. In which case be sure to get quotes from a selection of lenders.

Euribor & Mortgages in Spain

Euribor – the interest rate most commonly used to calculate mortgage payments in Spain – rose again in March (2007) to 4.106% (to be confirmed by the Bank of Spain).

This is the 18th monthly increase in Euribor, and places it at its highest level since August 2001. Euribor is now 32% higher than it was a year ago. This means that variable-rate mortgage interest payments in Spain (98% of all mortgages in Spain are variable rate) have also risen substantially.

Euribor is derived from the Eurozone base rate set by the European Central Bank (ECB). The ECB raised base rates in March from 3.5% to 3.75%, a move that was widely expected by the markets, and already priced into Euribor rates.
According to Jean Claude Trichet – President of the ECB – interest rates for the Eurozone are still moderate and expansionary, suggesting that there are more interest rate rises to come this year. Many analysts expect rates to rise to 4% this year (with another increase in June or July), though some financial institutions, most notably the Spanish bank BBVA, expect base rates to go as high as 4.25% this year.

Also in March, Spain’s National Institute of Statistics announced that the average mortgage value in January rose to 147,322, a 13.2% increase in a year. The Spanish Mortgage Association announced that mortgage default rates in Spain have risen to 0.41%, a level that is still close to historic lows.

But according to Spain’s Association of Independent Financial Advisors (La Asociación de Profesionales Asesores Independientes Financieros – AIF), quoted in the Spanish daily ‘La Vanguardia’ many Spanish households are struggling to meet today’s higher mortgage payments, which is why properties are now coming onto the market “20% cheaper than 3 months ago.”

What is Euribor, and how is it determined?

Euribor is a Euro system interbank lending rate determined by the key interest rate (on main refinancing operations) set by the European Central Bank (ECB). Basically, in terms that most people would understand, it is the interest rate that the banks used to lend to each other, and it is calculated by adding a small risk-premium to the base rate set by the ECB. So when the base rate goes up, so does Euribor, which in turn pushes up the variable mortgage interest rates in the Euro-zone. Most Spanish mortgages with variable rates are calculated as Euribor + X%, where X is normally anything between 0.75% and 2%.