February 2012 Archive

A small mortgage a big difference!

Even though the property market has seen significant price corrections over the past few years, they have tended to level out and hold some ground at least for the desirable ones!

It’s always a good idea to view a range of property at slightly higher prices than your budget will allow. This will help you to establish a true value, plus you never know how much you may be able to negotiate.

Even after negotiations and price reductions, we get many buyers that still need the extra 50,000 Euros!
It’s amazing what difference some additional funding can make, especially on properties under say 400,000 Euros

Buyer and seller expectations are still widely apart and even though sellers may have reduced their prices significantly, most are still willing to take a fair offer. However, there does come a point where one cannot go. Usually this is when a purchaser may see something fantastic but way beyond their budget and regardless tries their luck!

In most cases they do manage to get a substantial reduction but inevitably fall short. This is where a Spanish mortgage for a small amount could help you buy something very special. It could be a short term solution rather than take second best. You just need to be able to service the debt until you can pay it off in full should you wish to.

Cash buyers are always around and ready to secure a deal unlike anyone needing or considering some extra finance. It may well be worth your while to investigate the cost of some additional funding as it may help you fulfil a dream or acquire a property that will be a much better investment, especially if it attracts a considerable rental income.

Should this be the case, it’s better to know exactly how much you can get and at what cost as well as go through the banks means testing process before looking at properties. This means you are well prepared and ready to strike a deal. If you are unprepared and happen to find something special, chances are another cash buyer will pip you to the post by the time you get mortgage approval!

To help prepare anyone seeking a Spanish mortgage here is a simple outline of what a bank will require.
Take note that some of the figures and examples given will change but were correct at the time of writing 1st Feb 2012.

It’s also worth noting that many banks now require a physical appointment with you before you can open an account with them. It never used to be like this. However some do have banks in the UK which would suffice.

What will a bank require from you?

(Assuming you are working for someone else)

A copy of your employment contract
Three recent Wage slips.
The bank will also look at the strength of the company you work for.
Last P60 Tax return
Recent bank statement
Experian or Equifax credit report
If you have an existing mortgage they will want a copy of your payment history.
If you intend to obtain a mortgage in joint names both parties will need to supply all this information independently.
Passport copy
NIE number- you need to obtain this before purchasing a property in Spain. It’s used to pay taxes against. This can take a few weeks so it’s prudent to get one in advance.
Asset list. You need to write down a list of main assets like properties, investments and shares.

(Assuming you are self employed)

Same as above plus 2 years accounts

(Assuming you are a director of a limited company)

As above plus

Company details and registration number . Date of incorporation/ copy of certificate.
Your directorship/position and shareholding/ equity in the company. Last full set of audited accounts.
Company loans and a list of the board of directors.

For a bank to consider extending a mortgage to you, your debt to earnings ratio should be no more than 33% including your new mortgage! Credit cards are only taken into account should the debt on them be very excessive.

Usually mortgages can be extended as follows:

Non resident in Spain: Mortgage period up to 30 years but maximum age 75 and can lend up to 70% based on the minimum amount i.e. Valuation or purchase price.

You can pay off the mortgage at any time, partially or fully but you will be liable to a cancellation fee of 0.5% for the first 5 years. After that the rate drops to 0.25%.
This is governed by law and not a bank rule!

Most banks avoid interest only mortgages, so this is difficult to obtain and usually short term.

The mortgage can be for a resale property or for a new build project with a plot of land. In this case funds are given out over a period of time subject to the progress of construction.

Most banks require that you have your life insurance with them.
For the first year you must also use them for your buildings insurance. After which you are free to obtain alternative quotes but not for your life insurance as that is normally an integral part of your mortgage.

If resident in Spain you can get up to 80% mortgage for your main home, up to the age of 75, for a maximum period of 40 years. If it’s a second home this changes to a maximum 70% mortgage.

Mortgage cost (figures will vary)
A Spanish mortgage can have a fixed interest rate for its life, currently 6.1%
Variable rates are reviewed annually. Currently 1st year 4.25% then Euribor plus 2.2%
Euribor current rate is 2%. There is a minimum and a maximum on the rates to be applied. Currently 4,25% – 12%. This means that the interest rate will never be less than 4,25% (as first year) or more than 12%.
For example, if on rate review, Euribor is 1% , + 2,20 = 3,20%, regardless, the rate applied will be 4,25% as a minimum.

Initial set up fees are typically 1-2% of the amount loaned to you.

There is also a mortgage tax called ADJ and is 1.7% so you need to allow for this on the typical 10% purchase cost. Plus there will be extra notary and land registry fees for the new mortgage deed. However, if you take over an existing mortgage you can avoid the ADJ tax. See below.

Based on the above, lets say you are a non resident and wanted an extra 80,000 over 15 years.

A fixed rate of interest of 6.1% would mean your monthly payments including life insurance would be 710 euros.

If it was a variable interest rate the monthly payments for the first year would be 628.90 at 4.25%

To check the Euribor rate you can find it Here

Another option is to take over any existing mortgage on the property. Bearing in mind you will inherit the previously agreed mortgage terms, so worth studying to ensure you are happy with them. If you want to extend the term or increase the debt the bank have the right to change any previous interest rates and bring them up to date which may be to your disadvantage. If you leave all as is the terms should remain the same.

Most banks will want you to pay 20% of the amount declared at the notary and thus reducing the debt. This will not be reason for the banks to modify interest rates though.

Taking over a mortgage is called “subrogacion” doing this means you will avoid the set up tax of the mortgage deed known as ADJ (Actos Documentados Juridicos) also known as stamp duty. Banks will also negotiate or remove any set up fees if you ask them nicely!
All other purchase cost are the same and typically amount to 10%

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Posted by on Thursday 2nd February 2012