How pear shaped is your dream? For many Britons who were seduced by the dream of a property in Spain, and borrowed heavily in times of cheap credit to fund it, the answer is ‘very’, as they now struggle with mortgage payments in Spain.
British mortgage borrowers in Spain are being hit by a triple whammy of rising Euro mortgage interest rates, a falling pound against the Euro that makes rising monthly repayments even higher in pounds, and sliding house prices in Spain that are pushing many borrowers into negative equity, making it difficult to sell. Furthermore, rental yields bear no resemblance to the exaggerated claims of many estate agents, putting beleaguered mortgage borrowers under further strain.
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,” explains Susana De Las Cuevas, a dual-qualified Spanish and British solicitor in London. “And 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 mortgage payments in Spain?
The important thing is to act early on. “Don’t ignore the problem, and talk to your lender as soon as you can, preferably before missing a payment,” says De Las Cuevas. “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 in the UK is a big mistake because 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,” explains Lee Lyons, who runs The Spanish Mortgage Company – a mortgage broker in Spain.
Fortunately, the last thing mortgage lenders want is to foreclose your property, especially if they have to pursue you in the UK, 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,” explains Lyons. “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.”
But for many over-extended Britons in a financial pickle, 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 that might be cheaper than repossession. Of course the lower your price, the bigger your potential negative equity bill, so this will only be an option if you can sell at a price you have the funds to afford.
If all else fails, then your mortgage lender will repossess the property and sell it at public auction, which could take up to 2 years . If the proceeds from the sale are not enough to pay off your mortgage plus the penalty interest, and all other expenses incurred, then the bank will have to decide whether to pursue you in the UK. 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 if your debt is sizeable, then don’t be surprised if you hear from the bank’s lawyers in the UK.
But what if you are in the happy position of being a buyer in this market? Can you take advantage of rising foreclosures of 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 you are targeting know that you are a solvent buyer in a position move quickly. That way you might find a distressed vendor 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 the mortgage in Spain should be very wary of refinancing solutions that sound too good to be true. In times of distress like these, scams that prey on desperation abound. They nearly always leave your worse off than you would have been dealing with your original mortgage lender.