Mortgage financing: A good idea?

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.