Spanish Property Insight


Spanish Property Insight

Spanish Property Market Analysts

This Spanish mortgage guide explains how to go about getting a mortgage in Spain, how to remortgage a property in Spain, and what to do if you can’t keep up with your mortgage repayments in Spain.

The questions you will find answered in this guide include:

  • Can I get a mortgage in Spain?
  • Can I get an interest-only mortgage in Spain?
  • How much deposit do I need for a mortgage in Spain?
  • Is it easy to get mortgage in Spain?
  • Can you get a 100% mortgage in Spain?
  • Can foreigners get a mortgage in Spain?
  • How do you qualify for a Spanish mortgage?
  • Do Spanish banks do credit checks?
  • How much can I borrow in Spain?

For news and analysis check the Spanish mortgage market section, and for mortgage market data visit the Data Hub.

Getting started

The key to getting a mortgage in Spain is understanding how the Spanish mortgage market works, how much you can borrow, and how to approach the application process to get the best results. You also need to know about the different kinds of companies you can turn to for help, such as mortgage brokers, and of course the banks and lenders that offer mortgages in Spain. When the time comes to apply for a mortgage in Spain, it pays to know what’s going on in the Spanish mortgage market. As in all markets, there are good deals and bad deals, and with a financial product with such important long-term financial consequences like mortgages in Spain, you don’t want to lock yourself into a bad deal. This guide to getting a mortgage in Spain will help you on your way.

One of the best tips is to start looking into your mortgage options even before you start searching for property for sale in Spain. Leaving the financial side of your Spanish property purchase to the last moment does you no favours at all. If you leave it too late, and have to arrange your Spanish mortgage in a rush and under pressure, it is likely that you will end up with an expensive and inflexible loan. Just like anywhere else, Spanish mortgages often run for many years, so you may have to live with the consequences of you decision for years to come.

Make you search for a Spanish mortgage your top priority

The advantages of arranging your Spanish mortgage at the start of your property search are as follows:

  • It costs you nothing to start early
  • Forward planning helps you clarify the advantages and disadvantages of taking out a mortgage in Spain and make the best decision as to how much, if at all, to borrow
  • Arranging your Spanish mortgage in good time allows you to find the mortgage in Spain that best suits your requirements and avoid overpaying
  • By taking steps to arrange your Spanish mortgage at the start you will have a better idea of how much you can spend on your Spanish property and can work out the likely future financial implications of your purchase
  • Having your Spanish mortgage in place reduces the risks of you losing a Spanish property that it has cost you so much to find, and means one less source of anxiety and pressure when you are trying to close on a Spanish property

An overview of mortgages in Spain

Just like any advanced economy Spain has a developed mortgage market with numerous lenders offering a bewildering variety of Spanish mortgages.

Mortgages in Spain are offered by banks and savings banks (know as cajas in Spain) and sold either directly by the lenders, or through mortgage brokers. Several international banks offer mortgages in Spain alongside the national banks and cajas.

And just like any other developed mortgage market there are big differences in the costs and terms of the Spanish mortgages on offer, ranging from inflexible and expensive mortgages to cheaper and flexible ones.

Although the interest charged on all Spanish mortgages is calculated as a function of the base rate set by the European central bank, beyond that mortgage lenders in Spain are relatively free to set the charges and terms they offer, though they are constrained by the market. This translates into significant differences in costs and conditions between lenders, just like anywhere else.

Variable and fixed rate mortgages in Spain

The vast majority of mortgages sold in Spain (to both Spaniards and Foreigners) are variable rate mortgages, meaning that mortgage repayments vary according to the base rate set by the European central bank. Borrowers with variable rate Spanish mortgages cannot be certain what their mortgage payments will be in the future. If the interest rate falls they will pay less, but if it rises they will pay more.

Most lenders also offer a fixed rate mortgage, which tend to have higher interest payments in the short term, but if interest rates rise a fixed-rate Spanish mortgage holder will probably end up paying less than would be the case with a variable-rate. The great advantage of fixed rate mortgages is the certainty they give borrowers, who know exactly what their mortgage repayments will be for a set time into the future.

Some lenders also offer a mixed mortgage that involves a certain period (for instance 5 years) of fixed interest payments, and a floating rate thereafter. Interest-only mortgages are very rare, if not impossible to find.

Other mortgage terms

The mortgage you get will depend upon your financial profile. Lenders will want to know how much you earn and what your other financial commitments are (your personal balance sheet). As a general rule they will lend according to earnings multiples whereby your loan repayments on all your worldwide borrowing do not exceed 35% of your net annual income. However, if they think you have excellent career prospects, and that your income is likely to increase in the future (something that you would have to convince them of) they may be prepared to lend you more.

They also take into account the kind of property you want to buy. If you are buying a holiday home they will consider this riskier than a main home. They will assume you will default on your holiday home loan first if you get into difficulty. So, generally speaking, loan to value ratios for holiday homes are lower and conditions are more expensive.

What kind of a loan to value can you expect in Spain? Typically 60% to 70%, though during the boom it was possible to get more than 100% using inflated valuations. Today, after the credit crunch, you might not get more than 50% to 60%, if at all. It all depends on your creditworthiness.

How many years can you expect? It depends upon your age, but most mortgage terms in Spain run for 20 to 25 years, though during the boom lenders starting offering 40 years or longer. The longer the term, the smaller the monthly repayments, but the more the mortgage will cost you over the lifetime of the loan. Posts credit crunch, mortgage terms are falling.

Is mortgage financing right for you?

For most people there are good reasons for financing at least a part of a property purchase with a mortgage.

If you want to buy a home in Spain but don’t have the funds to do so outright then you have no option but to get a mortgage loan. But even people who have funds to buy outright might benefit from using a mortgage.

Advantages include the added legal due diligence conducted by the bank, and smaller ‘wealth tax’ (patrimonio) payments, though there are also costs associated with taking out a mortgage, as was explained in the section on Spanish mortgage costs.

The strongest argument in favour of using a mortgage is leverage, which means using borrowed money to buy an asset where all the capital gains accrue to you, not to the lender. So if property prices go up, and you meet all your mortgage payments, when the time comes to sell all the capital gains are yours. This is a very compelling argument when interest rates are low and house prices are rising, but can turn against you if interest rates rise and house prices fall.

So it boils down to where we are in the cycle. If interest rates are low and house prices are stable or rising, it makes sense to use leverage, in other words borrow to buy. But if interest rates are rising, and house prices have been rising for some time, and look like they might be near or at the top of the cycle, it might not be a good idea to take out a mortgage if you don’t need to.

Whatever you do always be conservative in your assumptions, and only borrow what you can afford even in a pessimistic scenario. Remember house prices can go down as well as up, as can interest rates.

Spanish mortgage costs explained

Spanish mortgage costs over and above the interest you pay can be significant. Here are the other costs you need to know about when taking out a mortgage in Spain.

Mortgage valuation

Before granting a mortgage a Spanish lender will require that the property be valued by one of their appointed valuation companies. This can cost anything from a few hundred Euros to over a thousand Euros depending upon the value of the property. The person applying for the Spanish mortgage has to pay this cost.

Spanish Land Registry Fee

Before a Spanish mortgage lender will grant a loan on a property it will insist on seeing a nota simple (land registry filing) that confirms that the property does not have any other unexpected debts attached to it. However you (or rather you lawyer) will need to request a nota simple from the land registry for you own sake so this can be considered a non-differential cost that you would face with or without a Spanish mortgage.

Spanish Mortgage Opening Fee

Most Spanish mortgage lenders charge a fixed fee for setting up a mortgage. This is typically 1% of the value of the mortgage, but can range from 0.5% to 2%.

Spanish Mortgage Insurance

There are three types of insurance to consider when arranging a Spanish mortgage. The first is general house and contents insurance. This is a legal requirement of Spanish mortgages and the lender must appear as the beneficiary of the house insurance. The amount of insurance required will be established by the valuation, and the insurance value will not be the same as the value of the property. The insurance value is the amount required to rebuild the property, clearly that will not include the value of the land as that would still exist. The other two types of insurance are life insurance and mortgage insurance. In both these cases insurance is not mandatory (as it is for house/building insurance), however it is worth considering them as not only is it important to have appropriate insurance cover but it will also help when negotiating better conditions for your Spanish mortgage. The costs of the insurance is based on your age and the loan amount and can vary from bank to bank. Generally speaking insurance is cheaper than the UK.

Mortgage Notary Fee

If a Spanish property has a mortgage secured against it this has to be declared before a Notary. Notary fees are based on the number of clauses in the deeds and a mortgage deed will have approximately the same number of clauses as a purchase deed. The notary will charge for this and therefore a Spanish mortgage increases the Notary costs at the time of signing the public deeds of sale.

Mortgage Land Registry Fee

Likewise the existence of a mortgage on a Spanish property (the mortgage is seen as a debt against the property) must be registered with the land registry. This slightly increases the land registry fees when buying property in Spain. The fee for registering a Spanish mortgage is approximately the same as the fee for registering the property.

Spanish Stamp Duty (AJD) on Mortgages

This tax on the real value (not the face value of new mortgages) used to be paid by borrowers, but a change in the law means that lenders will pay this tax from the 12th November 2018. That said, lenders will probably pass on the cost to borrowers in higher interest rates and fees. The tax varies by region.

Deed Arrangement Fee

This is a fee payable to the company (gestoria) who arrange for the deeds to be inscribed correctly in the local land registry. Lenders will normally insist on using their chosen gestoria as they need to be absolutely sure that both the property and the mortgage have been properly registered. This should not be more than a couple of hundred Euros

Mortgage Early Cancellation Fee

Spanish mortgage lenders do not like it when a client cancels a mortgage early (for instance if they have found a cheaper mortgage). Therefore they often impose a cost on early cancellation. It is common to find early cancellation fees of 1% of the value of a Spanish mortgage, though a good broker can find you a Spanish mortgage with little or no early cancellation fee. From the client’s perspective a Spanish mortgage without this fee is preferable as it makes the Spanish mortgage more flexible.

Mortgage Partial Cancellation Fee

Some Spanish mortgage lenders try to penalise clients who pay off part of their mortgage early. This is known as partial cancellation and will often carry a financial penalty related to the amount that is paid back early.

Mortgage Subrogation Fee

If a Spanish property that has a mortgage secured against it is sold the mortgage can be either cancelled or taken over by the new owner (known as subrogation). The subrogation fee is usually paid by the new owner and is typically lower than an opening fee for a new mortgage (0.5% instead of 1%). If you are offered the possibility of subrogating a Spanish mortgage it is important to bear in mind several factors. 1, subrogating a Spanish mortgage means continuing with the existing mortgage (that means the same conditions i.e. period and interest rate). In doing so you might not be taking over the best terms available to you in the Spanish mortgage market . 2, On the other hand all of the set up costs; Notary, land registry and taxes, are lower.

Mortgage Interest Payments

If you have a Spanish mortgage you will find that your monthly mortgage repayments are comprised partly of capital repayment and partly of interest on the loan (unless you have an interest-only mortgage, which are still not very common in Spain). At the beginning of the mortgage the interest payments will be the larger of the two, but as time goes by and you pay down the principal of the loan the interest payments will decrease in relation to the capital repayments. Interest payments are calculated as a function of the base rate set by the European central bank (Euribor). Some Spanish mortgages have a fixed rate for the first period – say the first year – and then go on to Euribor +x%. The ‘x%’ is the lender’s margin on the loan, and this will vary according to lender and client. In general the margin that Spanish mortgage lenders charge varies between 0.75% and 2.5% for variable rate loans.

Mortgage Capital Repayments

Capital repayments on a standard Spanish mortgage take place on a monthly basis and the amount depends upon the lifetime of the loan. The more years that you have to pay off the principal, the lower the monthly repayments in relation to the size of the overall mortgage. If you take out an interest only Spanish mortgage then you will not start paying back the capital until much later on (for instance after 10 years or at the end of the mortgage lifetime). The advantage of an interest-only Spanish mortgage is that monthly mortgage repayments in the short term are low. However you are not paying down the principal over time, and need to be prepared to return the capital in its entirety at the appropriate time.

Other Spanish mortgage related costs

When taking out a mortgage in Spain you should also allow for the following additional expenses:

  • Valuation. You will have to pay for the property to be valued. This may cost anything from a few hundred Euros to over a thousand, depending upon the value of the property. In most cases it costs between 300 and 500 Euros.
  • Arrangement fee. Most lenders charge an arrangement or opening fee, as in the UK. This normally varies from 0.5% to 1%, though some lenders may charge more than this.
  • Administrative fee. If you take out a mortgage the lender will insist that the paying of taxes and inscription of the title in the property register are carried out by a gestor appointed by the bank. This fee is likely to be a couple of hundred Euros.
  • Building insurance. If you take out a mortgage you will also have to take out building insurance. You don’t have to take out building insurance if you don’t use a mortgage, but you would be mad not to, so in reality this is not a differential expense.
  • Mortgage broker fee. It is usually a good idea to use a broker to help you shop around for the best mortgage and manage the application process. Some brokers charge a fixed fee of a few hundred Euros to consider your application whilst others provide this service for free. All brokers charge a fee based on a successful mortgage, which usually ranges from 0.5% to 1% of the value of the mortgage obtained. Be warned that some brokers may charge more than this.

Comparing the options

You will need to use a Spanish mortgage unless you have the cash to buy the type of property you want outright. Even if you have enough cash it may be in your interests to use a mortgage, so you should at least evaluate the question of using one before proceeding to search for property. So, what are your Spanish mortgage options?

Examples benefits of using a mortgage include some potential fiscal benefits, increased security of purchase due to the lender’s due diligence, and higher returns on your investment (due to leverage) if your property’s value increases. The main downsides of using a mortgage is the cost of taking one out, and the need to have cash available to meet mortgage payments now and in the future (when interest rates might be higher).

Spanish or foreign mortgage?

Should you use a Spanish mortgage, or a mortgage on your property at home? There are various good reasons for using a Spanish mortgage as opposed to a mortgage taken out on a property in your home country.

It makes sense to have the asset (the property) and the liability (the mortgage) in the same currency. This helps to minimise one source of uncertainty and risk (the Euro-Sterling exchange rate).

If you plan to rent out your property, and use the income to help finance the mortgage, then it makes sense to have your monthly mortgage repayments in the same currency as your rental income.

What about interest rates? If base rates are lower in Spain than back home that is a reason to take out a mortgage in Spain. But mortgages tend to last a long time and who knows where rates will be in 10 years time, so it’s best not to give too much importance to this question.

The best rule of thumb is to use a Spanish mortgage to finance a Spanish property purchase, so the loan and its collateral are both in the same currency and country.

You should tackle the question of whether or not to use a mortgage, and whether to take out a mortgage in Spain or another country / currency at the very outset. If you decide to use one you should starting marking arrangements almost before you do anything else. Quite apart from the fact that it costs you nothing to start early, there are also some significant advantages in doing so:

  • You have time to examine the question in depth and consider your options, which helps you take better decisions and avoid overpaying.
  • You go into your property search with a clearer idea of your budget.
  • You have a better chance of finding a mortgage with the best conditions. Otherwise you may end up with an expensive and inflexible mortgage.
  • You reduce the risk of losing a Spanish property that it has cost you so much to find, which means one less source of anxiety and pressure when you are trying to close on a Spanish property.

So start looking into your mortgage options and contacting brokers or lenders at the very start of your search for property for sale in Spain.

Example: Borrow in Spain or the UK?

British buyers have been the biggest group of foreign property buyers and borrowers for most of the last three decades, so let’s compare the options between Spain and the UK. The comparison method should be the same for other countries.

The first question you have to evaluate is how and where to raise the finance. As the overseas property market has developed so to have the financing options you face. Though there may be more exotic financing options available to some individuals, for most people the options are as follows:

Euro mortgage from mortgage lender in Spain Euro mortgage from mortgage lender in UK Sterling mortgage from mortgage lender in UK Remortgage UK property (Sterling)

You should contact mortgage brokers in both the UK and Spain, and have them explain the advantages (and disadvantages if you can get them to) of taking out the type of mortgages and conditions they offer, and then decide which option best fits your circumstances. Generally speaking, the advantages and disadvantages of each option are as follows:

Euro mortgage on Spanish property from Spanish bank. – Interest rate differential
– Asset & Liability in same currency
– Better match between rental income and mortgage payments
– Some fiscal advantages
– Expensive set-up & switching costs
– Repayments have to be made in Euros in Spain
– Potential complications of dealing with Spanish lender.
Euro mortgage on Spanish property from UK bank – Lower interest rates at present
– Asset & Liability in same currency
– Repayments in Stirling an option
– Dealing with UK bank
– Some fiscal advantages
– Expensive set-up & switching costs
– Repayments subject to exchange rate exposure
– Potentially high administrative costs
– Risk of uncompetitive exchange rates.
Stirling mortgage on Spanish property from UK bank. – Repayments in Stirling
– Dealing with UK bank.
– Expensive set-up & switching costs
– Higher interest rates at present
– Repayments subject to exchange rate exposure
– Asset & liability in different currencies.
Remortgage UK property in Stirling from UK bank – Cheap set-up & switching costs
– Repayments in Stirling and no exchange rate exposure on monthly payments
– Dealing with UK bank.
– Higher interest rates at present
– Requires having a suitable property in the UK
– Asset & liability in different currencies

As always, one person’s advantage is another’s disadvantage, so each alternative has to be evaluated in the light of your particular circumstances. However as a very general rule of thumb, remortgaging a UK property works out cheaper for short term mortgages of say between 5 and 10 years, whilst a new mortgage in Spain works out cheaper over longer periods (assuming that Euro-Sterling interest rate differentials remain as they are). What is clear though is that if you take out a mortgage in Spain you have to make very sure that you select a mortgage with favourable conditions, as the high set-up and switching costs of Spanish mortgages mean that mistakes are much more expensive to undo than in the UK. This means that it is very important that you deal with a trustworthy and experienced mortgage broker who won’t flog you an expensive and inflexible mortgage for a higher commission.

Taking out a mortgage in Spain

The mortgage market in Spain is fiercely competitive with a considerable number of lenders to choose from. Many, though not all, Spanish lenders have staff who can deal with English-speaking clients, but on the whole Spanish lenders aren’t ideally placed to manage applications from British buyers. Most of the big British banks also lend mortgages in Spain, along with offering Stirling mortgages on Spanish properties.

Given the complexity of the product, the difference in terms and conditions on offer, and your need to deal with fluent English speakers who will understand your circumstance, you are usually better off dealing with a mortgage broker who specialises in helping British buyers. Mortgage brokers do of course charge a fee, usually between 0.5% and 2% of the loan, depending upon the broker. Some also charge an administrative fee to evaluate your application.

If you work with a mortgage broker the application process is in theory quite straightforward.

  1. You fill in an appraisal form that enables your broker to evaluate your financial circumstances and provide you with an estimate of how much you can borrow. If you haven’t yet found a property this evaluation is useful as it helps you set an accurate budget for your property search. You should, therefore, have this evaluation done at the start of your search.
  2. Assuming your case is viable you will then be asked to provide certain documents such as payslips and tax returns, which are necessary to confirm your financial circumstances. If you have not yet found a property you can now leave the mortgage process on standby until you have (and with a better idea of your budget). If you have already found a property you will also be asked to provide details of the property, for instance a nota simple.
  3. Your broker will then use his or her experience of the mortgage market to submit your application to the lenders most likely to offer you the best conditions given your requirements. Your broker will arrange for a valuation of the property to be carried out by an appraisal company approved by all the lenders (cost 300 to 500 Euros), on the strength of which each lender will make you an official written offer. You discuss the pros and cons of each offer with your mortgage broker, and select the best one. The advice of an experienced mortgage broker, who can explain the hidden costs and benefits or each offer, will be invaluable at this stage.
  4. In most cases official offers are valid for 1 month, though in some cases they are valid for 3 months. You will need to coordinate the signing of the deeds with your broker and the vendor to ensure that it takes place whilst the offer is still valid.
  5. Before signing the deeds your broker will help you set up an account with the selected mortgage lender and you will need to transfer the funds to meet the costs of the transaction not covered by the mortgage. This will include your equity capital, taxes, fees and mortgage set-up costs.
  6. After the deeds have been signed your mortgage lender will take charge of paying the taxes (funds provided by you of course) and inscribing the title and mortgage in the land register. You will then start making your monthly mortgage payments.

It may help for you to know the following facts about mortgages in Spain:

  • Banks will lend up to 70% for second homes, though this depends upon your age and financial circumstances. Banks may be prepared to lend up to 100% to fiscal residents buying a principal home, though once again it depends upon your age and financial circumstances.
  • Spanish residents can get 35-year mortgages (depending upon age), with the possibility of 40-year mortgages imminent. Non-residents are normally only offered a maximum of 30 years.
  • Banks will only allow you to take out mortgage commitments of a maximum of 35% of your net after tax income. If you already have a mortgage in the UK or elsewhere, then your existing repayments will be included in this figure. Having said that some banks will allow you to go to 40% of net after tax income.
  • Opening (arrangement) fees in Spain are often between 1% and 1.5%.
  • Variable mortgage rates are often Euribor +1%. Euribor is the Euro-zone interest rate used to calculate mortgages rates in Spain.
  • Fixed-rate and interest-only mortgages are uncommon in Spain but they can be found. They are set to be more common and accessible in future.
  • Cancellation fees are often 1% for total early redemption. Partial redemption fees are negotiable.
  • The fee for changing mortgage lenders is often 0.5%.
  • If you take out a mortgage in Spain you will have to pay an administrative fee (gestor) for paying taxes and inscribing the mortgage and title in the property register. This fee is often between 250 and 350 Euros.
  • You will not get a mortgage for more than the value declared in the deeds, so bear this in mind if you agree to pay any amount under the table.
  • In general banks have much stricter lending limits for rural properties, and are unlikely to lend more than 40 to 50% of the price in such cases.

Remortgaging in Spain

To remortgage in Spain, as anywhere, is to change the basic conditions of your mortgage. These can include the amount, period of loan, interest rate paid and the type of repayment schedule.

The reasons for remortgaging are many, including raising more finance and reducing monthly repayments.

In order to change one or a combination of the conditions there are two basic formulas available to borrowers in Spain.

1. Subrogation, (modification, amplification) and cancelling and reopening.

In addition to the changes to your mortgage conditions, banks might insist on changing the number of titleholders and size of the security.

A variety of processes are in place to achieve this change.

Subrogation, this is when a new bank bids for your mortgage by improving the conditions to such a degree that your current mortgage provider does not want to engage in a bidding war and allows you to change banks.

When possible subrogation is the more cost effective way of improving your conditions. If the “remortgage” is limited to improving the interest rate. The costs associated include, notary fees and land registry fee, there will also be subrogation penalty fee of normally 0.5% payable to your bank, and finally an opening commission payable to the new bank.

Often banks will have special offer in order to attract new clients by inviting clients to subrogate their mortgage in exchange for assuming the costs of change. It is important to look closely at the new conditions. Clever marketing can mean that your mortgage conditions will be substantially improved during the first year, encouraging you to change, only to find out that in subsequent years the rate is linked to a series of products that result in a higher monthly spend.

Technically, in order to subrogate a mortgage the amount and the period of the loan must be respected. However, it is possible to arrange a modification and amplification of the mortgage in the same act.

In this case there will be additional costs associated and you will also be liable to pay stamp duty on any increase in the amount of the mortgage.

Subrogations will only be accepted after a rigorous study of your economic situation and your guarantee but above you will have to demonstrate, at least, that the last three mortgage payments have been paid correctly. No bank will consider subrogating your mortgage if you have any history of late payment.

2. Cancel your current mortgage and open a new mortgage.

This option will be more expensive as you will have a series of costs including a cancellation penalty normally 1% of amount pending, registry cancellation fee, a new bank opening fee, and finally notary and land registry fees in order to inscribe the mortgage and stamp duty on the amount of the loan.

If you are cancelling a current mortgage in order to open a bigger mortgage it is important to remember two essential factors. Any increase in the mortgage amount will have to be justified, and any increase will have to be covered by your guarantee (for example the property). Hopefully your guarantee will have increase in value, however it is possible that you will have to include an addition guarantee in order to secure a bigger mortgage.

Once again banks will only entertain a new mortgage after rigorously studying your economic situation and your collateral. You may have to provide three mortgage payment statements in order to prove your good payment history.

Spanish property valuations

You will need to get an official property valuation to get a mortgage in Spain

Property valuations, or ‘tasaciones’ in Spanish, play an important role in the Spanish property market as they determine how much banks are prepared to lend to house buyers.

The loan-to-value (LTV) ratio that mortgage lenders in Spain use is based on a mortgage valuation carried out by one of Spain’s accredited valuation companies, and not on the agreed sale price. These days post-crisis, valuations tend to be conservative and often below the sale price, which buyers who need a mortgage should bear in mind.

For example, if you have agreed to pay €100,000 for a property (not including taxes and other transaction costs which often add up to 12% of the price), and have €50,000 in own funds, then you will need a mortgage of €62,000 (€50,000 + 12% transactions costs of €12,000), which would be a LTV of 62% of the market price. Banks will often accept LTVs of 70% so this shouldn’t be a problem. However, if the mortgage valuation carried out by a professional valuer on behalf of the bank gives a value of €85,000, then a LTV of 70% works out at €59,500, which would leave you short of funds to complete the purchase.

The point is that your mortgage loan will be based on the mortgage appraisal value given by an accredited valuation company (tasador) working on behalf of the bank, and not based on the agreed sale price. This is an important variable to bear in mind when doing your numbers

You will also have to pay for the mortgage appraisal, which will cost a few hundred euro. The lender appoints the appraisal company, not you. They randomly select the company from a list of approved valuers that they work with, to avoid influencing the valuation in any way. So if you apply for a mortgage in Spain, the lender will arrange the valuation, but you will have to pay for it.

Understanding Euribor, the base rate

Euribor (12 month) is the interest rate most commonly used to calculate mortgage payments in Spain. It is used for both variable and fixed rate mortgages in Spain.

Fundamentally, Euribor is a Euro system interbank lending rate determined by the key interest rate (on main refinancing operations) set by the European Central Bank (ECB).

Basically, in terms that most people would understand, Euribor (12 month) is the interest rate most commonly used to calculate mortgage payments in Spain. It is the interest rate that banks in the Euro Zone use to lend to each other, and is derived from the base rate set by the ECB.

So when the base rate goes up, so does Euribor, which in turn pushes up the variable mortgage interest rates in the Euro-zone. Most Spanish mortgages with variable rates are calculated as Euribor + X%, where X is normally anything between 0.75% and 2%.

Problems paying your mortgage in Spain

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 may pursue you back home 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 repossess 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 overextended 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.

Foreclosure in Spain

In this case the most likely scenario is that the bank repossess 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. It all depends on which way the market segment you are in is moving.

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 made money in the crisis 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 Spanish mortgage broker about your mortgage problems in Spain.

Get help with your Spanish mortgage problems

The worst thing you can do, if you find yourself unable to pay your mortgage in Spain, is stick your head in the sand, and hope the problem will go away. It won’t. Take positive action now to start solving the problem, and relieve your anxiety and distress. Talk to your bank manager, mortgage broker, or financial advisor as soon as possible. 

Mortgage calculator

How much can you borrow to buy a property in Spain? To a great extent it depends upon your ability to pay the monthly mortgage costs. Use this mortgage calculator to estimate what your monthly mortgage payments would be according to different assumptions like the interest rate, repayment term, and how big a deposit you can afford to pay.