If you plan to finance your property purchase in Spain with a mortgage loan, here are some tips to ensure a smooth and seamless process.
Weigh the pros and cons. As a non-resident, mortgage terms in Spain may not be as favourable as they are for residents. It’s important to consider whether this financial commitment really benefits you and to assess how an increase in interest rates could affect you in the future.
Plan your mortgage in advance. As with any country, the sooner you start considering your mortgage application, the better. Planning ahead gives you time to compare offers and review terms and conditions. If you leave it to the last minute, you could end up accepting a less favourable loan.
Have your documents ready. For your mortgage application, you’ll need to provide proof of income, residency and possibly your credit history in your home country. Organising these documents in advance will save you time and prevent delays.
Compare options. There are many banking entities that offer mortgages in Spain, so it is essential to compare their terms and conditions. The differences in interest and additional costs can be significant.
Be prepared in Spain. To apply for a mortgage in Spain, you will need a NIE (Foreigner Identification Number) and a Spanish bank account. These requirements are essential to the process.
Analyze the associated costs. When reviewing the conditions of different loans, be sure to ask who assumes the costs of the mortgage, as they are not always the responsibility of the buyer. Some banks may cover certain expenses, while others will charge them to the client.
Be careful with floor clauses. Some mortgage contracts in Spain include floor clauses that impose a minimum percentage of interest, even when interest rates are lower. These clauses are not illegal, but they can be considered abusive if the bank does not clearly inform about them. Consulting with a professional can be useful in these cases.
Avoid prolonged commitments with a bank. Check whether your mortgage contract includes a clause that requires you to stay with the bank for a certain period (in some cases, the full term of the loan). This can limit your ability to switch to a bank with better terms later. Also check whether you are required to take out additional products, such as insurance, which could increase your costs.
Consider the help of a broker. Mortgage brokers can save you time and money by doing the searching and comparing of offers for you. Make sure you choose one that is reputable, experienced and duly registered in Spain.
Think about the long-term commitment. Mortgages in Spain typically last between 15 and 20 years. It is a significant financial responsibility, so it is worth considering how it will fit into your long-term finances.
Types of Mortgages in Spain
The Spanish mortgage market is very competitive, meaning there is a wide range of options available. However, for non-residents, loan options and terms tend to be more restricted. Below, we explore the main mortgage terms in Spain and the most common types.
Mortgage Terms in Spain
Spanish banks, like those in other countries, consider second homes to be at a higher risk of default, as they see them as secondary assets and dispensable in the event of financial difficulties. This makes loan terms for second homes more limited than for primary homes. The LTV ratio and repayment terms are usually lower and the terms stricter.
LTV Ratio
For residents in Spain, it is common for banks to offer up to 80% of the value of the property, and even up to 90% for first-time buyers. However, for non-residents, the LTV is much lower: it is usually around 60%, and in some cases, only 50% of the purchase is financed. Therefore, non-resident buyers should expect to cover at least 40% of the cost of the property on their own.
Mortgage Term
While residents in Spain can access mortgages of up to 40 years, non-residents usually have a repayment term between 15 and 20 years.
Interest Rates
Spanish mortgages use the Euribor, a reference rate set by the European Central Bank, on which banks add an additional percentage. Although banks are free to set their own rates, competition in the market means that rates are similar between different banks.
In 2020, the Euribor was at negative levels, and banks were offering variable mortgages with an added interest of the Euribor between 0.5% and 2%, while fixed mortgages were around 2% to 4% over the Euribor.
Spanish mortgages product types available
Choosing the right type of mortgage for your needs depends on your short, medium and long-term plans. These are the main types of mortgages that can be found in Spain:
Variable Interest Mortgage
Traditionally, this is the most popular type of mortgage in Spain, especially since the Euribor is at low levels. Variable interest mortgages allow you to take advantage of low rates, although they have the disadvantage that monthly payments can vary, as the interest rate can increase in the future.
Fixed Interest Mortgage
Although they were less popular in the past, lately many buyers opt for fixed interest mortgages due to the stability they offer. These mortgages allow you to know exactly how much each monthly payment will be for the entire duration of the loan, and protect you from future increases in interest rates. Their main drawback is that the cost is usually higher than for variable mortgages when interest rates are low.
Interest-Only Mortgages
This type of mortgage allows the borrower to pay only the interest during the first years of the loan (usually the first two). They are uncommon in Spain and are usually available only to residents. The advantage of this type of mortgage is that the initial monthly payments are lower, although in the long term they are more expensive due to the additional time needed to pay off the principal.
Foreign Currency Mortgage
Some buyers may consider a mortgage in a currency other than the euro. Although it is an uncommon practice, some Spanish banks offer loans in other currencies, such as the British pound or the Swedish krona. The main advantage of this type of mortgage is the reduction in currency exchange costs when making payments. However, obtaining a mortgage in a non-euro currency is more complicated, and banks often charge more for this type of loan.
If you plan to purchase a property in Spain to rent out, either as a holiday home or for long-term rental, it is often more advantageous to apply for a mortgage in euros. Financial experts recommend minimising currency exchange risks by keeping the asset and the loan in the same currency, so that the rental income can cover the loan payments.
Costs Associated with a Mortgage in Spain
When taking out a mortgage in Spain, it’s essential to be aware of the additional costs that may arise. Here’s a breakdown of the main fees and considerations:
Who Pays the Fees
Traditionally, the buyer covered all mortgage-related costs, but recent court cases have allowed buyers to reclaim some expenses from banks. Be sure to confirm which fees you’re responsible for before signing.
Valuation Fee
The bank requires a property valuation to approve the loan, and this process can cost anywhere from a few hundred to several thousand euros, depending on the property’s value.
Who pays: Generally, the bank should cover this, as they need to verify the property’s value.
Mortgage Fee
Banks charge a setup fee based on the loan amount, typically between 0.5% and 2%. Although the European Court of Justice suggested that buyers shouldn’t be charged this fee, it’s not fully enforced in Spain yet.
Who pays: The buyer, but you may be able to negotiate.
Stamp Duty (AJD)
This tax is applied to the mortgage loan and varies by region. For instance, in Andalucía (Costa del Sol), it’s 1.5%.
Who pays: The buyer.
Notary and Land Registry Fees
These fees increase slightly if a mortgage is involved, as it must be included in the property’s title deeds.
Who pays: These can be negotiated with the bank.
Gestoría (Administration) Costs
The bank may assign a gestoría to handle taxes, fees, and registration. If the bank requires a specific gestoría, they should cover the fee.
Who pays: If a bank-mandated gestoría is used, the bank should cover this cost.
Insurance Policies
The mortgage requires property insurance that covers both the structure and the contents inside. Although you’re not obligated to take out the insurance with the bank, they may offer better loan conditions if you do. Banks may also suggest life or loan protection insurance policies, which, while not mandatory, provide additional financial security.
Who pays: The buyer. It’s advisable to compare prices, as insurance offered by banks isn’t always the most economical.
Subrogation Fee
If you buy a property in Spain that already has a mortgage, you may choose to take over that loan. Transferring the mortgage to the new owner has a fee, usually around 0.5% of the outstanding loan balance.
Who pays: The buyer.
Compare and Negotiate
Some mortgage costs are unavoidable, but it’s possible to negotiate others. Competition among banks in Spain is high, and they may be willing to reduce valuation fees and setup fees to win your business. However, keep in mind that in exchange for reducing certain fees, the bank may apply a higher interest rate or charge more for the loan itself.
Knowing these details and understanding which costs you can negotiate will help you streamline the purchase process and reduce the overall expense of your mortgage in Spain.
Advantages of taking out a loan in Spain
Before making a decision about a mortgage in Spain, it is essential that you consider both the pros and cons. The viability of the loan will largely depend on your financial situation and your long-term plans.
There are several reasons to opt for a mortgage in Spain, including:
Increasing your budget
One of the most obvious benefits is that a mortgage allows you to purchase a property of higher value or with better features. In areas popular with foreign buyers, an extra budget can make the difference between a standard property and a more attractive one. However, it is important to be realistic: most Spanish banks offer non-residents financing of up to 60% of the property’s value, although 50% is usually more common.
Higher potential return
By buying with a mortgage, you use less of your own capital, which can increase the return on investment if you sell the property in the future. This is especially beneficial when interest rates are low and property prices are on the rise, as has been the case on the Costa del Sol in recent years. However, there is no guarantee that interest rates will remain low or that prices will continue to rise.
Additional due diligence
When applying for a mortgage in Spain, the bank conducts investigations to detect possible legal problems with the property and carries out a valuation. This increases the security of the purchase, although if you have a lawyer, you should also have additional support in these aspects.
Carefully analyse your financial situation and set a realistic budget. If you can foresee that you will be able to meet the payments for the entire duration of the loan, even if interest rates rise or your circumstances change, a mortgage in Spain could be a good decision. However, if this is not the case, it may be preferable to avoid debt.
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