Falling prices, rising mortgage costs, lower rental yields – is it time to say hasta la vista to the holiday home in Spain?
Sunday Times Home Section, 11 May 2008
Has your dream of a holiday home in Spain turned into a nightmare? For many Britons who borrowed heavily during the years of cheap credit to buy on the costas or beyond, the answer, unfortunately, is “yes”.
Those persuaded to finance their purchase with a Spanish mortgage are being hit by a triple whammy: rising euro-mortgage interest rates, a surging euro that makes their monthly repayments even higher in pounds, and falling house prices that threaten to push them into negative equity.
Furthermore, even when they succeed in letting their properties, the rental yields often bear little resemblance to the exaggerated claims made by estate agents when they bought.
And that is not to mention the thousands of people who own homes that, it has transpired, were built without proper planning permission and could now be demolished following a clampdown by the authorities.
Patrick Cassidy, 58, and his wife, Joy, 61, are among those ruing the day they bought in Spain. In spring 2006, at the peak of the market, they paid €375,000 (then worth £262,000) for two flats near La Manga, on the Murcian coast in the southeast of the country, with a deposit of just £6,000 and a 125% mortgage. Things rapidly began to go wrong.
“At first, our mortgage payments were about €740 [£510] a month for each apartment, but that went up to €940 [£660] a month in late 2007, when the interest-only period expired and interest rates went up,” says Cassidy, a taxi driver. “We had one tenant for seven months, but his rent didn’t even cover the mortgage. Now, with the exchange rate going bad, the apartments are costing us about £2,000 a month. We are taking a pasting and we can’t afford it.”
Several months – and several thousand pounds – in arrears on his payments, Cassidy has handed back the keys to the bank. Because of what appear to have been irregularities in the way he was sold the mortgage, the matter will probably end there. Other British investors caught in negative equity may not find it quite so easy to walk away from their debts – which have been exacerbated by the pound’s 15% slide from just over €1.50 early last year to the current €1.27.
“Under EU regulations, Spanish lenders can pursue outstanding mortgage-related debts against assets in the UK,” says Susana de las Cuevas, a dual-qualified Spanish and British solicitor with Irwin Mitchell in London. “Ignorance is no defence, so you can’t argue you didn’t know you would be liable in the UK.”
So, what do you do if you find you can’t keep up with your payments? The important thing is to act sooner rather than later. “Don’t ignore the problem, and talk to your lender as soon as you can, preferably before missing a payment,” de las Cuevas advises. “You may be able to negotiate a solution – and, even if you can’t, burying your head in the sand will only make it worse.”
Going into denial and hoping your debts won’t catch up with you back home is a big mistake: it drags out the process, which drives up the final cost to you. “All missed payments 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 escalates the longer it takes,” says Lee Lyons, who runs The Spanish Mortgage Company, a home-loan broker.
Fortunately, the last thing mortgage lenders want to do is repossess your property, especially if they have to pursue you in Britain, so your negotiating power with the bank may be stronger than you think. “They are likely to give you every chance to negotiate better conditions – perhaps a longer term or an interest-only period,” Lyons says. “If you can get your 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.”
For many overextended Britons, however, better mortgage terms might 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 it could work out cheaper than repossession.
If all else fails, your mortgage lender will repossess the property and sell it at public auction, which could take up to two years. If the proceeds from the sale are not enough to pay off your mortgage, along with the penalty interest and all other expenses incurred, then the bank will have to decide whether to pursue you in Britain. If your outstanding debt is small – a few thousand pounds, say – then they may decide that it isn’t worth it, as debt collection is not cheap. If your debt is sizeable, however, don’t be surprised if you hear from the bank’s UK-based lawyers.
What if you are in the happy position of being a buyer in this market? Can you take advantage of rising foreclosures on holiday homes in Spain to snap up a bargain at auction? Probably not, is the honest answer. Really great opportunities still get snaffled up by insiders long before auction, and those that do make it through may be earmarked by the “auction mafia” – who are people you don’t want to cross. If you bid against the wrong person in a public auction in Spain, there is no telling what might happen to your property. Your best bet is to let bank managers and estate agents in the area know that you are a solvent buyer in a position to move quickly. That way, you might find a distressed vendor who is prepared to take a big hit for a quick sale to avoid the costs of repossession.
One final word of warning: anyone struggling to pay their Spanish mortgage should be wary of refinancing solutions that sound too good to be true. In times like these, scams that prey on desperation abound. They nearly always leave you worse off than you would have been dealing with your original lender.
© Mark Stucklin (Spanish Property Insight)