Financing Your Spanish Property Purchase
March 5th, 2007
You have scoured all the brochures, visited countless properties and you have at last found your dream home. You now think that the decision making process is almost over and all you have to decide is what colour to paint the walls and the style of furniture you want in the living room. Unfortunately, there is still one important decision to be made – that is how you will finance your purchase.
Even if you are a cash purchaser, a mortgage may be a tax efficient way to avoid some of Spain’s harsh tax laws or perhaps re-mortgaging your existing UK property may allow you to lower your UK repayments, thereby releasing more funds to spend on your new Spanish Home.
This article looks at Spanish Mortgages and the primary differences between Spain and the UK and what must be taken into consideration when looking at each system.
Firstly, in the UK there is a very competitive mortgage market with Banks and Building societies vying for your business. In Spain the usual source of a mortgage is through the Banks, although some of the larger UK Building societies such as the Halifax, have established branches in Spain. Competition is no less fierce however, and you are perfectly able to take a mortgage offer from one bank to try and get a better offer from another, there is nothing to stop you playing one off against another, or even several!
The Spanish banks tend to have much stricter lending criteria than you will find on offer in the UK and this may cause problems. For example, the Spanish banks will usually only lend up to a maximum 80% of the value of the property and this can be even lower for a non-resident.
The important thing to mention here is that the value is not the current market value, the price you have agreed to pay, but it will be set by a valuation company and is based among other things, on the cost of rebuilding the property. This should not be confused with the UK survey, as it is not the condition of the property that is important, merely what its value is should it need to be sold by the bank and this is usually set at what would reflect a “worse case scenario”. Therefore, while you may be purchasing a property for say €250,000 the bank may consider the value to be only €175,000.
If the bank is then prepared to lend only 80% of this value (€140,000, and then only for residents with perhaps only 60% or €105,000 being offered to non-residents) you are then left having to find the remaining balance of €110,000, more if you are non-resident. It is not uncommon for purchasers to only be able to raise 50 or 60% of the property’s purchase price with a Spanish Mortgage, having to resort to other finance or existing capital to make up the difference. Such a way might be to remortgage a UK property for the balance, effectively meaning 100% of the purchase price is obtained by mortgaging two separate properties. A danger here is that the Spanish mortgage is far less flexible than the UK equivalent and should your circumstances change you are unlikely to be able to raise finance by releasing any equity in your Spanish home and you may have to consider re-mortgaging the property entirely, with the burden of the associated fees and charges. If you have already used the equity in your UK property your options might be restricted further.
Spanish Mortgages are also invariably for a much shorter period of time than their UK counterparts and repayment schedules of only 15 years are common. Certainly, the banks will want to see the mortgage redeemed by a maximum age of 75. You will also find that the banks are less generous than those in the UK when considering what a manageable amount to borrow might be. Typically they will lend an amount that can be repaid using no more than 30% of your disposable income. With the shorter periods of mortgage term this may increase the monthly repayments required and meaning the banks will not lend you as much as they might in the UK, which are based on a gross earnings multiple rather than disposable income. Some banks will make allowances for any rental income when calculating the amount they will lend, but most will not. All banks will however, take into account the joint earnings of the owners and will need to see payslips and bank statements to verify these figures as well as conducting a credit check on you.
Regardless of any perceived difficulties and the stricter lending requirements, it is a fact that the attraction of a Spanish mortgage is that traditionally Spain offered a far lower interest rate than available in the UK. This is due to the Spain’s interest rates being tied to the Euribor, (Euro Interbank Offered Rate) and mortgage rates of 3% or even less were common in 2005 and 2006 which compare favourably with even the most generous introductory rate offered here in the UK. However low the mortgage interest rates might be today, remember that rates may increase and so will your repayments. It is far better to borrow slightly less and have a degree of margin than be stretched should the interest rates rise.