When things start to go wrong, a common reaction is to bury one’s head in the sand and hope the problem goes away. This would be a big mistake if you find that you are having problems paying the mortgage in Spain. The longer you ignore the problem, the more it is likely to cost you in the long run. So get working on an action plan immediately.
Negative equity in Spain
First of all, wise up to the fact that you can be pursued for negative equity in the UK, or wherever it is you live and have assets. So don’t make the mistake of thinking that you can walk away from your mortgage in Spain with no adverse financial consequences. Your Spanish mortgage lender is very likely to come after you if you have significant mortgage debts once foreclosure is complete.
“Under EU regulations Spanish lenders can pursue outstanding mortgage-related debts against assets in the UK,” explains Susana De Las Cuevas, a dual-qualified Spanish and British solicitor in London. “And ignorance is no defence, so trying to argue you didn’t know you would be liable in the UK won’t work.”
Repossession costs rise the longer it take
Going into denial and hoping your debts won’t catch up with you is a big mistake because it drags out the process, which drives up the final cost to you. All the payments you miss are added to the debt, as are any legal fees the bank incurs, and you start paying a higher penalty interest rate, so your debt will quickly escalate. The longer the process takes, the more expensive it will be for you. And be warned, the penalty interest rate you pay is much higher, potentially over 20%. If you want to know what penalty interest rate you will pay you should be able to find it on your mortgage deeds.
Many Spanish mortgage lenders are quite slow to react when non-residents start missing monthly mortgage payments, and many people make the mistake of thinking that a slow reaction is good for them. Sometimes it is because the bank doesn’t have your latest contact details (it is your responsibility to make sure your lender has your correct contact details), and sometimes it’s because the bank is badly managed. The longer the bank takes to respond, the higher the cost to you, so don’t wait for the bank to contact you if you are in arrears. Contact them as soon as you recognise you have a problem, preferably before you miss a payment.
Negotiate new mortgage conditions
Luckily, the last thing your mortgage lender wants to do is reposes your property. Repossession is an expensive pain in the neck for mortgage lenders, so your negotiating power with the bank may be stronger than you think. They are likely to give you every opportunity to negotiate better conditions, perhaps a longer term, or an interest only period, and if you can get your mortgage payments down to a manageable level, and make a bigger effort to get some rental income, it may give you breathing room to survive until the market picks up. So it may be possible to restructure your mortgage, and the sooner you do it the better.
However, for some over-extended borrowers, better terms will not help much. In this case damage limitation is required, and a quick sale at a loss is likely to be the least bad solution. Dropping your price might mean having to pay more to clear your mortgage debt, but in the long run that might be cheaper than repossession.
To give you an example, say you bought an apartment for €200,000, with an 80% mortgage of €160,000. If you manage to sell for €160,000 you will be able to clear the mortgage, but if you sell for anything less than that, you will have to pay the bank the difference. So if you sell for €140,000, you will have to pay the bank €20,000 Euros to clear your mortgage debt. The lower the sale price (below the mortgage value) the bigger your negative equity bill.
Selling below the mortgage value is only an option if you can raise the funds to pay off the bank for any negative equity. Given the state of the market in 2008, with property values plunging in many areas, the resulting bill for negative equity could be substantial, and potentially as big, or bigger, than the equity already invested. Example: you bought for €200,000, with an 80% mortgage of €160,000, and equity of €40,000, then sell for €100,000, with negative equity of €60,000. Your total loss will be €100,000 plus expenses. Some people will not have the funds to cope with negative equity. What then?
Foreclosure in Spain
In this case the most likely scenario is that the bank reposes your property, and sells it at public auction (potentially for a lower price than you could get dropping your price today). This will take time – often a year or more – adding legal and other costs onto your negative equity bill, which the bank might then pursue you for at home (if your outstanding debt is small, say a few thousand Euros, the bank may decide it isn’t worth it, as debt collection is not cheap). But anything you can do to speed up the process will reduce the final cost to you, so if you are certain that repossession is the only solution, make this clear to your lender, and try to get them to move quickly.
On the other hand, if the bank takes a long time to auction your property – say 2 years – the market might pick up in the meantime, enabling the bank to get a better price at auction than you would today. This is possible, but given the way the market is going, I would say it is very unlikely.
If you cannot afford to keep paying your mortgage payments in Spain, and cannot afford to sell in negative equity, then you don’t have many options. In this situation some people try to refinance. Depending upon your circumstances this may be a good solution, but for many, the chances of doing any better with a new lender are slim, and the refinancing operation will cost money. Indeed, quite a few unscrupulous mortgage brokers are now making money offering spurious refinancing packages to desperate people. In times of distress, scams that prey on desperation abound.
Remortgaging in Spain
Having said that, quite a few people will be able to work out a solution to their mortgage problem with the right advice. There are things you can do to reduce your monthly mortgage payments, and increase your rental income. It might be enough to tide you over until the market picks up. Talk to your bank, or a good, honest Spanish mortgage broker about your mortgage problems in Spain.