Spanish Mortgages
It is possible to borrow freely from outside Spain in any foreign currency for sums up to 1.5 million Euros without any authorisation provided the lender is not based in a 'tax haven'. A home-buyer in Spain can therefore obtain a mortgage from a lending institution in any country and in any currency denomination. In practice it is different. Lenders are always reluctant to lend against a property located in another country for it is difficult to repossess a foreign property if anything goes wrong.
However, lenders in Britain are quite relaxed about homeowners' equity in their UK homes being used to fund the purchase of a second property overseas. Most people who are looking to buy overseas have a lot of equity. As long as the repayments are affordable, extending a UK mortgage should not be a problem. In the majority of cases a UK mortgage will be in the same currency as the borrower is earning. It is easier to arrange than an overseas mortgage and the costs of remortgaging in the UK will be less than those involved in arranging an overseas mortgage.
The Spanish banks too can be mortgage providers. A Euro denominated mortgage is calculated on a different basis compared to charges on a UK sterling denominated mortgage. Spanish mortgage rates are commonly quoted as 'Euribor' plus a percentage. For example a mortgage advertisement will state 'Euribor + 1%'. Euribor is the Interbank lending rate used across the entire Euro zone. As such, it is used as a common benchmark for consumer borrowing across a wide range of loans including credit cards and mortgages.
There are no building societies or their equivalent in Spain with the exception of a few of UK parentage. Spanish banks therefore have a captive market for the provision of home finance. Spanish mortgages are on a repayment basis with loan and interest both repaid by installments.
Endowment and interest-only mortgages are not known in Spain . The criteria for granting a Spanish mortgage are similar, but more restrictive than in the UK .
- The earnings of one or both purchasers are taken into account. Allowances are made for letting income.
- The property is valued not at market value, but at a rebuild cost per square metre. Most banks will not lend an amount whereby the monthly repayments are greater than 30% of net disposable income.
- The maximum mortgage for a non-resident is around 60% of the valuation and for a resident around 80%.
- A combination of a low valuation based on rebuilding cost and a low mortgage based on that valuation means an actual mortgage may only be 40% of the market value of the property.
- Mortgages are usually granted for a maximum of 15 years and repaid before age 75.
- A separate mortgage deed does not exist. The existence of a mortgage is stated in the escritura prepared by the notario.
- The cost of a new mortgage is around 5% and 1% for redemption. Life insurance for the amount borrowed is also required.
- Buying off plan with stage payments will only have a mortgage granted at final payment in the presence of the notario which means the size of the mortgage is also limited to the size of the final payment. As this can be 60% it is no problem. If the earlier stage payments are more substantial, banks will offer a credit facility for these payments.
If personal circumstances change, it may be necessary to raise money on a foreign property. The Spanish mortgage market is much less flexible than the UK 's. Money is lent only in order to buy or improve a property.
Once the property has been purchased, equity release is virtually impossible. So the only way you can raise money on a foreign home is to sell it - and a forced sale is seldom on advantageous terms to the vendor.
However, financing a property in Spain can offer more options than a straightforward mortgage extension on a UK home. Less risk is achieved by borrowing in Euros. When currencies move, the asset will move in the same direction as the mortgage. Alternatively if income is in pounds, it is not a bad idea to have a loan in pounds as well, so any currency fluctuations will not change the payments.
Confused? Some people overcome complexity by compromise, achieving a 100% mortgage on a Spanish property, financing it by a 50% mortgage extension on their UK property and a 50% Spanish mortgage.
