Hi All
I found this terrific comprehensive article on mortgages etc. in Spanish-Living.com and thought you might be interested in reading it. Its rather long, but very interesting:
"Spanish mortgage insight
Arranging your Spanish mortgage early on saves you money
If you are serious about buying a property in Spain then you should start arranging your Spanish mortgage almost before you do anything else. Leaving the financial side of your Spanish property purchase until the end does you no favours whatsoever. 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 get an expensive and inflexible Spanish mortgage. And never forget that Spanish mortgages run for many years so you will have to live with the consequences of your decision for years to come.
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 loosing 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 the Spanish mortgage market
Just like any advanced economy Spain has a developed mortgage market with a number of lenders offering a great 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, including British banks like Barclays and Lloyds TSB, 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 of the Spanish mortgages they offer. This translates into significant differences between Spanish mortgages in terms of their costs and conditions. Not only do Spanish mortgages vary in their attractiveness from bank to bank, they also vary considerably within the same bank, and even from branch to branch.
The following list gives you an idea of the number of mortgage lenders operating in Spain (this list is not exhaustive).
Mortgage lenders in Spain
BANKS
SAVINGS BANKS (CAJAS DE AHORRO)
Banco Atlántico
Banco de Sabadell
Banco Guipuzcoano
Citibank España
Banco Bilbao Vizcaya Argentaria (BBVA)
Banco Pastor
Barclays Bank
Banco Santander Central Hispano
Banco Zaragozano
Deutsche Bank
Lloyds TSB España
Solbank
Banesto
ING Direct
Bankinter
Spanish Mortgage Association(AHE)
Federation of Spanish Savings Banks (CECA)
Bilbao Bizkaia Kutxa
Caixa Galicia
Caja Duero
Caja Madrid
Caja Sur
La Caixa
Kutxa
Caixa Catalunya
Caja Cantabria
Caja España
Caja del Mediterráneo
Caja Vital
La General
Unicaja
Caixa Penedés
Caja de Burgos
Caja de Ahorros de la Inmaculada
Caja Murcia
El Monte
Ibercaja
Halifax España
With so many potential lenders, many of which who do not market their Spanish mortgages to foreign buyers, it is difficult if not impossible for foreigners to find the best deals on the market. However if you don't shop around, or use a broker who shops around for you, it is highly likely that you will end up with a relatively expensive and inflexible Spanish mortgage that will cost you thousands of Euros more than you need to pay over the lifetime of the mortgage.
Types of mortgages in Spain
As in other countries such as the United Kingdom the vast majority of mortgages sold in Spain (to both Spaniards and Foreigners) are variable rate mortgages. This means that mortgage repayments vary according to the base rate set by the European central bank (this has been set at 2.00% since June 2003). 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 Spanish mortgage. These Spanish mortgages tend to have higher interest payments in the short term but if interest rates rise a fixed-rate Spanish mortgage holder might end up paying less than would be the case with a variable-rate Spanish mortgage. At the very least they give borrowers the ability to know exactly what their mortgage repayments will be for a set time into the future.
Some Spanish mortgage lenders also offer a mixed mortgage that involves a certain period (for instance 5 years) of fixed interest payments, and a floating rate thereafter.
And recently some Spanish mortgage lenders have started offering an interest only Spanish mortgage under which borrowers only pay interest on the loan in their mortgage repayments, and then return the capital either at the end of the mortgage or at some point in the future during the lifetime of the mortgage. This kind of Spanish mortgage can be very interesting for foreign investors who plan to rent out their Spanish property to cover the mortgage costs and do not plan to hold their Spanish property for more than 10 years.
Recently Spanish mortgage lenders have increased the lifetime of mortgages that they are prepared to lend (depending upon the age of the borrower). Where as in the past most Spanish mortgages were for between 10 and 20 years now most lenders offer mortgages of 25 years or even longer. Longer Spanish mortgages reduce the size of monthly mortgage repayments and therefore stimulate demand for Spanish property by making it accessible to a wider market. This fact, along with the reduction of interest rates to historical lows and the number of foreigners buying property in Spain, have been primary drivers of the Spanish property boom in recent years.
How do Spanish mortgage lenders price their mortgages?
Spanish mortgage lenders will decide how much to lend you and on what terms according to your personal and financial profile. They will want to know how much you earn and what your other financial commitments are (your personal balance sheet - assets and liabilities). As a general rule of thumb they will lend according to earnings multiples whereby your Spanish mortgage repayments will not exceed 35% of your net annual income. However if they think you have excellent career prospects and that your income is very likely to increase in the future (something that you would have to convince them of) then they may be prepared to lend you more that the general rule would imply. Also the younger you are the more they may be prepared to lend you (all other things being equal) because they assume that you have a longer working life in which to pay off your mortgage in Spain.
They also take into account what kind of a property you want to buy. If you are borrowing for a Spanish holiday home they will consider this a more risky loan than if you are borrowing for y our primary residence. This is because they assume that if you get into financial distress you are more likely to default on your holiday home rather than your primary residence.
In general Spanish mortgage lenders don't like to lend more than 60% to 70% of the value of the property to foreign buyers of Spanish property. They consider foreign mortgage applicants as awkward because their risk profile is harder to gauge than for Spanish clients, and because language can often be a barrier (most of the documentation that lenders prepare is in Spanish). Nevertheless this is starting to change as Spanish mortgage lenders realise how important foreign buyers of Spanish property are and how big the market is. And in the meantime a good Spanish mortgage broker can get foreign buyers a Spanish mortgage with a loan-to-value of up to 80% (depending upon the circumstances of the applicant), with the lowest costs on the market and most flexible terms. This is partly because some Spanish mortgage brokers specialise in foreign buyers and this experience helps them to quantify the risks on behalf of the Spanish mortgage lender. This changes the attitude of the lender from 'I don't understand foreign clients so I won't lend much and I'll make it expensive just in case' to 'This mortgage broker has given me a very good idea of the creditworthiness of this client so I'm going to lend the client the amount needed and on good terms'. A good Spanish mortgage broker also removes the language problem as they interface between borrower and lender and provide both sides with all the information then need in their respective languages.
Spanish mortgage costs explained
The following table explains all the costs you might face as a consequence of taking out a Spanish mortgage.
Cost Description
PROPERTY 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.
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 your 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.
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%.
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 asnot 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.
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.
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.
STAMP DUTY (AJD)
This is a tax paid to the government and is calculated as a percentage of a Spanish mortgage. The amount can vary from region to region and vary according to the amount of the mortgage. From a minimum of 0.85% to a maximum of 1.7% of the value of the mortgage.
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
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.
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.
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. 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.
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 buy 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.
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
Is a Spanish mortgage a good idea?
There are nearly always good reasons for financing at least a part of a property purchase with a mortgage. However at a time like this, with Euro-zone interest rates so low, it makes particular sense to consider using a Spanish mortgage to take advantage of the extraordinarily cheap cost of borrowing. With inflation around 3% - 3.5% in Spain, and base rates at around 2% the real cost of borrowing money in Spain has recently been zero or negative. Therefore even if you have the cash to purchase your Spanish property outright there is a good argument to be made for using the bank's cheap money to finance at least a part of your purchase, and to put your own money to work earning a good return elsewhere.
In this golden scenario you borrow from the bank at next to nothing in real terms, and if the value of property in Spain rises, as it has done almost every year in the past, you profit from all the capital gains. In the meantime you have your own funds invested in other assets also earning you a return. Having said that you should always borrow on the assumption that interest rates will go up at some point, and be sure that if they do you will be able to cope with the financial consequences. To put it another way don't borrow more than you can cope with if interest rates rise - and they are sure to- especially if you are relying on rental income to cover your financing costs (your rental assumptions are another source of uncertainty that you need to evaluate carefully).
Should you use a Spanish mortgage or UK mortgage when buying property in Spain?
The arguments in favour of using a Spanish mortgage as opposed to a mortgage taken out in the UK are as follows:
First of all it makes sense to have the asset (the property) and the liability (the mortgage) in the same currency (i.e. Euros). This helps to minimise one source of uncertainty and risk (the Euro-Sterling exchange rate).
Secondly the interest rates at present on Spanish mortgages are lower than those on British mortgages, and are expected to remain lower for the foreseeable future. This means that your monthly interest payments will be lower with a Spanish mortgage.
Thirdly 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.
Finally most UK mortgage lenders are not geared up to deal with lending against Spanish property. Whilst Spanish lenders may not be familiar with foreign borrowers, UK lenders are not familiar with Spanish property and this may cause them to give you unfavourable terms.
Therefore on balance, and especially under the present economic circumstances, we recommend a Spanish mortgage over a mortgage taken out in the UK. Nevertheless each buyer has their own unique circumstances and this recommendation may not apply to all buyers.
Courtesy of Spanish Property Insight
