Taxes are not the only expense you will have to meet as a consequence of owing a property in Spain. You are almost certain to have to pay some utility, maintenance and cleaning costs. These will all depend upon the type of property, size, characteristics, location, and use. Here we list the typical additional costs you may face, and before buying a property you may need to quantify each of these costs so that you know what kind of an ongoing financial commitment you are taking on.
Community fees in Spain
If the property you buy is part of a community of owners you will have to pay your share of the annual community fees (cuota). You can find out what the annual quota for any property that you are considering buying or have bought is from the secretary or administrator of the community.
Insurance in Spain
You are strongly advised to take out building insurance when you buy a property in Spain (if you use a mortgage your mortgage lender will insist that you do). Insurance premiums in Spain are considerably lower that in the UK, and you can get a quote rapidly from any number of insurance brokers (see www.spanishpropertyinsight.com for insurance brokers). If you wish to quantify your insurance premium before you buy you should find out what information insurance companies require to prepare a quote, and then gather this information during one of your visits or from the estate agent. You should also consider taking out content insurance, and mortgage insurance if applicable. If you plan to rent out your property you will need an insurance policy that reflects this.
Utilities costs in Spain
The owner of a rural property with a private well, solar panels, butane tank deliveries, a mobile phone and broadband satellite internet connection will not have to pay any utility charges. However most British people, who own properties in villages or urbanisations, will have to pay for water, electricity, gas and a telephone line. All utility connections involve a fixed fee for the connection, and a variable charge according to use. When buying a resale property you should be able to find out the utility running costs from the vendor.
Property Maintenance costs
All properties incur cleaning and maintenance costs that will depend upon the size, age and location of the property. A garden and a pool will also increase the time and expense of looking after a property. In many areas where the British tend to buy there are companies that offer a full cleaning and maintenance service.
Rental management costs
If you rent out your property you will need to hire a company to manage the marketing and rental of the property, though it is now possible to do some of the marketing and booking yourself via the websites that have sprung up to offer this service over the last 5 years. If you use a local company to provide you with the full service you will probably have to pay around 30% or more of the gross rental income to the company. As a non-resident you will not be able to deduct any of this fee for tax purposes.
If you take out a mortgage to buy your property you will have to meet monthly mortgage payments. These will depend upon the conditions of the mortgage you have taken out.
Arranging your finances
It should be obvious that sound financial arrangements need to be made if you are to enjoy a successful purchase. It is surprising, therefore, how few people seem to address the financial side of things in a structured and organised way. The better you understand and arrange your finances, the more financially comfortable you are likely to be with the purchase over the long term. Furthermore, by carefully evaluating your finances and optimising the way your structure the purchase, you may be able to spend more on a property than you thought, and still not place your finances under unreasonable stress.
There are 3 main financial issues to address before you buy.
The first is to work out an accurate property budget, taking into account you own funds, how much you can sensibly borrow, and the costs of the purchase.
The second is to estimate and plan for the ongoing financial commitments that you take on when you buy a property in Spain. These may be in addition to your living costs in the UK, and therefore an extra cost, or instead of your living costs in the UK, if you are relocating to Spain. Whatever your situation you don’t want these costs to take you by surprise.
And finally, unless your finances (savings and earnings) are in Euros, you will need to understand and manage your exchange rate exposure, both for the purchase and for ongoing commitments.
Work out your property budget
Your objective is to work out the maximum you can afford to spend on a property without putting your finances under stress. If you use a mortgage you won’t know your exact budget until you have had the property you want to buy valued, which can sometimes cause problems. Therefore always be conservative in your assumptions.
The following table will help you organise your budget:
(TABLE NOT AVAILABLE)
First you need to work out the funds at your disposal, and then search for a property that matches your budget, bearing in mind the transaction costs involved. Once you have found a property you need to be sure that your numbers still add up given any extra costs. It is always important to keep funds in reserve for unforeseen expenses when fixing your property budget. It is important to establish a clear budget at the outset. However your budget may change as your proceed in your search for several reasons. You may, for instance, be able to borrow more or less than expected based on the property valuation carried out by the bank, or refurbishment costs may be higher than expected. Whatever happens you always have to keep a firm grip on the numbers to avoid serious problems.
Working out your ownership budget
When calculating your purchase budget you should also estimate the ongoing financial commitment you are taking on. The bigger and more expensive the property you buy, the higher the ownership costs will be. The following table serves to identify the costs you will need to estimate and plan for:
(TABLE NOT AVAILABLE)
If you are planning to rent out your property when not using it to help meet some of your ownership costs, then you will have to estimate your rental income and related expenses. Estate agents often overstate rental potential and understate the related costs, so always do your own independent research on this question if rental potential is critical to your ownership budget. At the very least you should talk to rental agents in the area who are independent of the company you are buying from.
Managing your exchange rate exposure
Unless your savings or income are in Euros you will have to pay close attention to this issue, as exchange rate fluctuations can increases or decrease your financial commitments quite substantially in quite a short period of time.
The following example shows how much of a difference the Euro / Pound exchange rate can have on a property purchase. These figures are based on the highest and lowest Euro / Pound exchange rate in the last 5 years:
Exchange rate exposures can be particularly problematic when you make stage payments over many months.
The following table gives a typical example of the stage payments involved in an off-plan purchase for a 300.000 Euro property, and shows the impact of Euro / Pound exchange rate movements over time on the overall price:
Because the Pound weakened against the Euro during this period the property ended up 8% (13.854 Pounds) more expensive than it had been when the buyer signed the purchase contract and took on the Euro liability.
Of course if the Pound had strengthened against the Euro during this period the buyer would have ended up paying less in Pounds. However most buyers have to work within their budgets and need to be certain at the time of signing the purchase contract how much the property is going to cost them in Pounds. This is as true for buyers signing a private contract with completion in 2 months time as it is for off-plan buyer with completion in 2 years time. Most people can’t afford to have exchange rates go against them, which means fixing the exchange rate when taking on a Euro liability (or buy Euros on the spot). The best way to reduce exchange rate uncertainty is to use financial instruments such as forward contracts that help you to manage your exchange rate risk.
Whilst working out your budget you should contact a specialised currency broker to discuss these issues in the context of your requirements. A good broker will be able to explain recent Pound / Euro trends and advise you on the best exchange rate strategy in your circumstances. You should always avoid buying Euros through a high street bank as they tend to offer the worst rates that can add thousands of pounds onto the cost of your purchase, depending upon the amount of Euros you buy.
Once you own your property in Spain you will probably need to transfer funds to Spain on a regular basis to meet your ownership costs. Once again you should discuss the matter with a currency broker and make the necessary arrangements to ensure regular transfers at the best rates.
You will need to use a mortgage unless you have the cash to buy the type of property you want outright. Even if you have enough cash it may be in your interests to use a mortgage, so you should at least evaluate the question of using one before proceeding to search for property. Examples benefits of using a mortgage include some potential fiscal benefits, increased security of purchase due to the lender’s due diligence, and higher returns on your investment (due to leverage) if your property’s value increases. The main downsides of using a mortgage is the cost of taking one out, and the need to have cash available to meet mortgage payments now and in the future (when interest rates might be higher).
You should tackle the question of whether or not to use a mortgage, and whether to take out a mortgage in Spain or the UK at the very outset. If you decide to use one you should starting marking arrangements almost before you do anything else. Quite apart from the fact that it costs you nothing to start early, there are also some significant advantages in doing so:
- You have time to examine the question in depth and consider your options, which helps you take better decisions and avoid overpaying.
- You go into your property search with a clearer idea of your budget.
- You have a better chance of finding a mortgage with the best conditions. Otherwise you may end up with an expensive and inflexible mortgage.
- You reduce the risk of losing a Spanish property that it has cost you so much to find, which means one less source of anxiety and pressure when you are trying to close on a Spanish property.
So start looking into your mortgage options and contacting brokers or lenders at the very start of your search.
The first question you have to evaluate is how and where to raise the finance. As the overseas property market has developed so to have the financing options you face. Though there may be more exotic financing options available to some individuals, for most people the options are as follows:
|SECURED AGAINST PROPERTY IN SPAIN||SECURED AGAINST PROPERTY IN UK|
You should contact mortgage brokers in both the UK and Spain, and have them explain the advantages (and disadvantages if you can get them to) of taking out the type of mortgages and conditions they offer, and then decide which option best fits your circumstances. Generally speaking, the advantages and disadvantages of each option are as follows:
|TYPE OF MORTGAGE||ADVANTAGES||DISADVANTAGES|
|Euro mortgage on Spanish property from Spanish bank.|
|Euro mortgage on Spanish property from UK bank|
|Stirling mortgage on Spanish property from UK bank.|
|Remortgage UK property in Stirling from UK bank|
As always, one person’s advantage is another’s disadvantage, so each alternative has to be evaluated in the light of your particular circumstances. However as a very general rule of thumb, remortgaging a UK property works out cheaper for short term mortgages of say between 5 and 10 years, whilst a new mortgage in Spain works out cheaper over longer periods (assuming that Euro-Sterling interest rate differentials remain as they are). What is clear though is that if you take out a mortgage in Spain you have to make very sure that you select a mortgage with favourable conditions, as the high set-up and switching costs of Spanish mortgages mean that mistakes are much more expensive to undo than in the UK. This means that it is very important that you deal with a trustworthy and experienced mortgage broker who won’t flog you an expensive and inflexible mortgage for a higher commission.
Taking out a mortgage in Spain
The mortgage market in Spain is fiercely competitive with a considerable number of lenders to choose from. Many, though not all, Spanish lenders have staff who can deal with English-speaking clients, but on the whole Spanish lenders aren’t ideally placed to manage applications from British buyers. Most of the big British banks also lend mortgages in Spain, along with offering Stirling mortgages on Spanish properties.
Given the complexity of the product, the difference in terms and conditions on offer, and your need to deal with fluent English speakers who will understand your circumstance, you are usually better off dealing with a mortgage broker who specialises in helping British buyers. Mortgage brokers do of course charge a fee, usually between 0.5% and 2% of the loan, depending upon the broker. Some also charge an administrative fee to evaluate your application.
If you work with a mortgage broker the application process is in theory quite straightforward.
- You fill in an appraisal form that enables your broker to evaluate your financial circumstances and provide you with an estimate of how much you can borrow. If you haven’t yet found a property this evaluation is useful as it helps you set an accurate budget for your property search. You should, therefore, have this evaluation done at the start of your search.
- Assuming your case is viable you will then be asked to provide certain documents such as payslips and tax returns, which are necessary to confirm your financial circumstances. If you have not yet found a property you can now leave the mortgage process on standby until you have (and with a better idea of your budget). If you have already found a property you will also be asked to provide details of the property, for instance a nota simple.
- Your broker will then use his or her experience of the mortgage market to submit your application to the lenders most likely to offer you the best conditions given your requirements. Your broker will arrange for a valuation of the property to be carried out by an appraisal company approved by all the lenders (cost 300 to 500 Euros), on the strength of which each lender will make you an official written offer. You discuss the pros and cons of each offer with your mortgage broker, and select the best one. The advice of an experienced mortgage broker, who can explain the hidden costs and benefits or each offer, will be invaluable at this stage.
- In most cases official offers are valid for 1 month, though in some cases they are valid for 3 months. You will need to coordinate the signing of the deeds with your broker and the vendor to ensure that it takes place whilst the offer is still valid.
- Before signing the deeds your broker will help you set up an account with the selected mortgage lender and you will need to transfer the funds to meet the costs of the transaction not covered by the mortgage. This will include your equity capital, taxes, fees and mortgage set-up costs.
- After the deeds have been signed your mortgage lender will take charge of paying the taxes (funds provided by you of course) and inscribing the title and mortgage in the land register. You will then start making your monthly mortgage payments.
It may help for you to know the following facts about mortgages in Spain:
- Banks will lend up to 70% for second homes, though this depends upon your age and financial circumstances. Banks may be prepared to lend up to 100% to fiscal residents buying a principal home, though once again it depends upon your age and financial circumstances.
- Spanish residents can get 35-year mortgages (depending upon age), with the possibility of 40-year mortgages imminent. Non-residents are normally only offered a maximum of 30 years.
- Banks will only allow you to take out mortgage commitments of a maximum of 35% of your net after tax income. If you already have a mortgage in the UK or elsewhere, then your existing repayments will be included in this figure. Having said that some banks will allow you to go to 40% of net after tax income.
- Opening (arrangement) fees in Spain are often between 1% and 1.5%.
- Variable mortgage rates are often Euribor +1%. Euribor is the Euro-zone interest rate used to calculate mortgages rates in Spain.
- Fixed-rate and interest-only mortgages are uncommon in Spain but they can be found. They are set to be more common and accessible in future.
- Cancellation fees are often 1% for total early redemption. Partial redemption fees are negotiable.
- The fee for changing mortgage lenders is often 0.5%.
- If you take out a mortgage in Spain you will have to pay an administrative fee (gestor) for paying taxes and inscribing the mortgage and title in the property register. This fee is often between 250 and 350 Euros.
- You will not get a mortgage for more than the value declared in the deeds, so bear this in mind if you agree to pay any amount under the table.
- In general banks have much stricter lending limits for rural properties, and are unlikely to lend more than 40 to 50% of the price in such cases.