Foreign borrowers have higher risk of mortgage default, warn Moody’s

With foreign demand for homes in Spain once again on the rise, the international ratings agency Moody’s has warned that lending mortgages to foreign buyers carries a higher risk.

With mortgage interest rates at record lows, new mortgage lending surging, and foreign demand for property in Spain rising strongly (at least pre-Brexit), it stands to reason that mortgage loans to foreigners are on the rise (though I have not seen any figures yet to support this).

Against this background a recent report from Moody’s warns that foreign borrowers have a higher risk of default than Spanish residents, especially when LTVs are higher than 80%.

Moody’s quantify the risk of default as three times higher when the borrower is a non-resident foreigner (second home owner) and the loan has already been renegotiated once. The reason being that non-residents with Spanish mortgages on holiday-homes on the coast are much more likely to walk away from their debts assuming, rightly or wrongly, that they will not be pursued back home for repayment.

When foreign owners of holiday-home in Spain get into financial difficulty the first thing they do is stop paying the mortgage on their second home in Spain. With mortgage lending booming again, and the number of foreign borrowers on the rise, Moody’s are just pointing out that the risks are higher, and why.

DISASTER LAST TIME AROUND

When the last boom turned to bust and interest rates shot up at first, many non-residents who used mortgages to buy holiday-homes in Spain found they could no longer afford to pay the mortgage. I assume this was the case for thousands of people (maybe tens of thousands), many of them from the UK and Ireland, where people are more comfortable with debt (the Germans, in contrast, tend to be cash buyers).

What happened next? Nobody knows because it has never been studied. The Spanish banking system was in chaos at the time. Many non-residents simply walked away from their debts and property, and never heard any more of it. Some would have tried to renegotiate, others fell into areas but made the payments they could. The impression I get is that Spanish lenders made a bad situation worse by managing it badly, and ended up recovering far less than they could have.

Do Spanish lenders pursue non-residents for the debts back home? They can in theory pursue EU residents (it’s much harder outside the EU), but it is a long and expensive process, so I guess it all depends on the size of the debt and the profile of the debtor. To date I have never heard of anyone being chased back home by a Spanish lender, and if anyone knows of a case I would be interested to hear about it (use the comments or contact form below). There is a great article by Raymundo Larrain Nesbitt on this question which you can read here: Spanish creditors pursuing debts abroad.

I am still being contacted by people who have been clinging on for years, struggling to keep up with their mortgage payments, but have finally reached breaking point. One option is to contact your lender and try and negotiate a one-off payment to hand back the property and cancel your debt. You have stronger cards than you think.

The bottom line is Spanish lenders need to charge non-residents a higher rate of interest and offer lower LTVs to compensate for the greater risk, and foreign buyers should only borrow what they can comfortably afford to repay even if interest rates go up. Both sides have to be more careful this time around.

About Mark Stücklin

Mark Stücklin is a Barcelona-based Spanish property market analyst, and author of the 'Spanish Property Doctor' column in the Sunday Times (2005 - 2008).

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