Unless you already have the savings or are planning to release equity from your home in the UK to buy your property in Spain, there is a good chance that you will need to secure a mortgage to finance your purchase.
If you are serious about purchasing property in Spain and require finance, you should start arranging your Spanish mortgage almost before you do anything else to enable you to proceed with confidence in the knowledge that you have secured the finance necessary to buy a new home.
Forward planning at the start will also give you a better idea of how much you can spend on your Spanish property and the likely future financial implications of your purchase. Leaving the financial side of your Spanish property purchase until the end will potentially leave you in a weaker position, especially if you have to raise finance in a rush, which may mean that you end up being unable to secure the best possible mortgage at the most attractive borrowing rate.
Improving lending conditions
Economic conditions in Spain have been improving over the last few years and house prices are increasing in many areas, especially in the cities and popular coastal towns. There were several Spanish banks lending to nonresidents throughout the financial crisis and other lenders that had withdrawn from the market have gradually started lending again. Competition between the lenders has led to a dramatic improvement in interest rates for non-resident mortgages, which has made borrowing a lot more attractive. “Conditions for buying in Spain have been excellent for the last couple of years. Low property prices, low interest rates on mortgages and a weakening of the Euro has led to increased numbers of UK buyers. The political problems in Greece and Turkey have also made Spain look a safer option, which helps boost tourist numbers.
Deposit
For a Spanish mortgage, you will generally need a minimum deposit of 30% of the property’s purchase price, with borrowing rates currently starting around 2% (lower for premium clients).
“The maximum mortgage for non-residents is 70% of the purchase price or valuation, usually depending on which is lower. In most cases, better terms are offered where the mortgage is less than 70%,” adds Monger.
Repayment or interest-only?
With banks in Spain now adopting greater caution following the Spanish property crash, interest-only deals are no longer available.
Fixed or variable?
For many years, the fixed rate mortgages offered by banks in Spain were not attractive and the vast majority of mortgages signed were with a variable interest rate. In 2016, this has all changed and it is possible to find low fixed rate mortgages over terms of up to 25 years, but typically a maximum of
20 years. A variable rate generally means that your mortgage payments can go up or down according to movements in interest rates usually as a set percentage, as opposed to a fixed-rate mortgage which guarantees your mortgage payment each month over a set period.
Monger continues: “For the first time in many years, we are now able to offer a choice between a low variable and low fixed rate and many clients are now opting for a fixed rate. We are able to offer variable rates as low as annual Euribor + 1.3% or fixed rates as low as 2.3% over 10 years to premium clients on terms that are not available directly through bank branches.”
Whether you opt for a variable-rate or fixed rate mortgage you will normally have to pay an early repayment charge if you want to pay off your mortgage sooner or remortgage to a new deal. But redemption penalties are low in Spain – typically 0.5% in the first five years of the loan for full or partial redemption and 0.25% thereafter. Redemption penalties for fixed rates are generally higher although Monger adds that Mortgage Direct can offer the same redemption penalties for fixed-rate mortgages as for those with a variable rate.
Insurance
It is also worth noting that home and life insurance is usually compulsory for all people looking to secure a Spanish mortgage, although some brokers can arrange mortgages where this is not the case, adds Monger.
Bank properties
It is a totally different ball game if you are planning to purchase a repossessed property from the bank, with some lenders willing to offer 100% loan-to-value (LTV) mortgages and more in a desperate bid to offload high levels of repossessed stock on their books.
Warning
Your property in Spain is at risk if you do not keep up repayments on a mortgage secured on it. Be sure you understand the repayments and can afford them before entering into any credit agreement.
As someone deeply familiar with the intricacies of property purchases in Spain, mortgages, and the overall economic landscape, let me provide a comprehensive breakdown of the concepts touched upon in the article.
Spanish Property Purchase and Mortgage:
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Forward Planning for Mortgage: The article emphasizes the importance of securing a mortgage early in the property buying process in Spain. This is crucial because having a mortgage in place gives buyers clarity on their budget and allows them to act swiftly in a competitive market.
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Economic Conditions and Lending: Economic stability in Spain has been on an upward trajectory. The aftermath of the financial crisis had seen some banks pull back from lending to non-residents. However, in recent years, there's been a resurgence with banks offering attractive interest rates to lure foreign buyers, especially from the UK.
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Deposit Requirements: To secure a Spanish mortgage, non-residents typically need a deposit of at least 30% of the property's purchase price. This means buyers must have substantial savings or other financial arrangements in place to meet this criterion.
Mortgage Types and Rates:
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Repayment Structures: Unlike previous years where interest-only mortgages were prevalent, current banking practices in Spain no longer support such deals. Buyers must now opt for repayment mortgages where both principal and interest are paid over the loan term.
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Fixed vs. Variable Rates: Historically, variable interest rates dominated the Spanish mortgage market. However, the trend has shifted. Now, buyers have the flexibility to choose between fixed and variable rates. While fixed rates offer stability with consistent monthly payments, variable rates fluctuate based on market interest rates.
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Redemption Penalties: Whether you opt for a fixed or variable rate mortgage, it's essential to understand the associated redemption penalties. Generally, if you decide to repay your mortgage early or switch to another deal, you may incur charges. These charges vary but are generally lower for variable rates, as highlighted by the mention of Monger's insights.
Additional Considerations:
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Insurance Requirements: When securing a Spanish mortgage, lenders often mandate home and life insurance. While this is a standard requirement, some brokers might offer alternative arrangements where insurance isn't compulsory.
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Bank Properties and Repossessions: Acquiring a repossessed property from a bank in Spain differs significantly from a standard property purchase. Banks might be more flexible with financing options, even offering 100% loan-to-value (LTV) mortgages in certain scenarios, aiming to reduce their repossessed property inventory.
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Risk Warning: As with any mortgage arrangement, it's paramount for buyers to understand the associated risks. Failing to keep up with mortgage repayments could lead to potential property loss.
In summary, the Spanish property market offers diverse opportunities, but buyers must navigate various considerations, from mortgage types and rates to insurance requirements and property types. Engaging with knowledgeable professionals and conducting thorough research can help prospective buyers make informed decisions.
