Comparing you Spanish mortgage 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 UKRemortgage 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.