New Spanish mortgage regulations could discourage banks from lending to buyers who live outside the Eurozone, with implications for the holiday-home market

Regulations governing mortgage lending in Spain have been changed frequently in recent years, and the latest changes include measures that will make banks think twice before lending to people who live outside the Eurozone, like the UK.

The latest changes to Spanish mortgage regulations came into force last Monday, and you can read a synopsis of the changes in lawyer Raymundo Larraín’s article linked to below.

The new regulations comply with the latest European directives, and are meant to increase consumer protection in a business where lenders have behaved unscrupulous for as long as anyone can remember. But some of the new regulations go too far, and create obstacles for borrowers.

As Raymundo points out, forcing borrowers to visit a notary not once but twice is a practical problem for non-residents. It complicates the conveyancing process even further, increases costs and delays, and could well result in fewer buyers from abroad.

New Spanish mortgage regulations Catch 20

The Spanish property portal Idealista points out another problem for potential borrowers who live outside the Eurozone. According to Idealista, clause 20 of the new regulations stipulates that non-residents financing a Spanish property purchase with a mortgage in Spain can change the currency of the mortgage from Euros to their home currency anytime they like. It sounds like good news for foreign investors, but experts warn it will give banks an incentive to avoid lending to foreigners.

So let’s be clear: Clause 20 allows foreign residents who live outside the Eurozone, and that includes Spaniards, to demand their mortgage be redenominated in their local currency. “This is a big stumbling block for mortgage lending to foreigners from outside the Eurozone,” explains Fernando Encinar, head of research at Idealista. “Under the new law, borrowers have the right to redenominate their mortgage into their local currency at any time, which introduces an exchange rate risk that wasn’t priced into the mortgage by Spanish lenders, and makes lending [to foreigners] much more complicated.”

Fernando Encinar, head of research at Idealista.com

Banking sources consulted by Idealista say they are waiting for the authorities to clarify this clause, which they say is “very confusing and vague” as it stands. For example, it says nothing about how the interest rate might change with redenomination. That said, industry sources don’t expect the clause to apply to many borrowers, but it’s still an extra risk to be born in mind, and one that will raise costs and barriers of lending to foreigners.

Notaries and industry insiders consulted by Idealista say some banks will simply stop lending to foreign residents who live outside the Eurozone, which includes the UK.

Quantifying the impact of new mortgage laws in Spain

Last year 6.7% of new mortgage loans were made to foreigners, around 23,000 loans, according to data from the Association of Spanish Land Registrars.

The data doesn’t reveal the residency status of borrowers, and how many live outside the Eurozone, but we can see that the three biggest groups of foreign borrowers were, 1st, the Romanians, 2nd, the British, and 3rd, the Chinese, all of them citizens of non-Eurozone countries, accounting for close to 30% of foreign demand for Spanish mortgages between them.

Most of the Romanian and Chinese borrowers probably live in Spain, but the same cannot be said of most of the British market, who made up 8.54% of foreign borrowers last year (around 2,000 mortgages). It’s not hard to imagine that, thanks to clause 20, which could introduce an exchange rate risk for lenders, Spanish mortgage conditions for UK residents will get a whole lot less attractive from now, reducing UK demand (along with Swedish, Russian, Ukrainian, Norwegian, and US demand) for second homes in Spain.

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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