While it is certainly fortunate to be able to purchase a primary or secondary residence with funds that you already have in your bank account, many people who are able to do so opt to finance the purchase in part by borrowing from a lending institution, often a bank, secured against the property that they are purchasing. Applying for a mortgage in the UK is relatively straightforward. Many of us have done so at least once, if not multiple times. Apart from being advised by your solicitor as to the potential effect of a mortgage, that is about all that you need to know.
In Spain the system is slightly more involved and considerably more costly.
What is different about a Spanish mortgage?
The two principal differences are the expenses of setting up the mortgage and the steps that are taken in order to do so.
Applying to a Spanish bank for funding is not complex. You can do so directly. Once the bank has decided to lend to you based on your personal circumstances and the property that you are hoping to purchase, it will send you a FIPER, which sets out all of the relevant information. A FIPER is not a binding offer per se, but in practice it is a clear indication of the bank’s intention to lend. As with the purchase of a Spanish property, a mortgage is signed before a Notary in Spain. At the completion meeting, the Notary will check that the terms of the mortgage document accord with the terms set out in the FIPER. The mortgage document is very detailed, setting out the amount to be borrowed, the way in which the repayment is to be calculated and the rights and obligations of both the borrower and the lender. The Notary charges a fee for that document. Typically, the mortgage document is signed immediately after the sale and purchase document, at the same Notary’s office, on the same day, in the same room. In that way the funds are available to use for the purchase. Once the mortgage document and sale and purchase document have been signed and the seller has been paid, all at the same meeting, purchase tax must be paid.
What are the costs associated with a Spanish mortgage?
In the UK we refer to purchase tax as Stamp Duty Land Tax. The percentage of tax payable in Spain in relation to the purchase depends upon where in the country the property is located. In Spain a mortgage is also subject to stamp duty, between 0.5% and 1.5% of the total potential exposure of the bank, depending upon where in Spain you purchase. The total exposure of the bank includes the principal sum that you borrow, penalties over a defined period if you fail to make payments, and the likely cost of foreclosure if that is necessary. Typically the total exposure of the bank is up to 1.5 times the principal sum borrowed. The result is that a loan of €100,000 can attract tax of up to €2,250. Together with the Notary’s fee and a fee charged by the property registry for registering the mortgage, as well as the bank’s arrangement fee, other bank admin charges and a valuation fee, the total cost of borrowing €100,000 can be up to approximately €5,500.
Because the bank can only have security for the loan if your property purchase is registered first, the lending bank will take responsibility for registering the purchase and then registering the mortgage. You will need to make payment to the bank of an amount to cover all taxes, fees and expenses relating to the purchase and the mortgage. Once the property purchase and the mortgage is registered, then your documentation will be returned to you evidencing your ownership of the property and the mortgage.
Important update in relation to Spanish mortgage expenses
At the end of 2018 the Spanish supreme court ruled that it was unlawful for the banks to pass on the expenses of arranging the mortgage to the customer. The matter is still being considered in a number of legal cases but the legal position at present is that these expenses ought not be borne by the customer. The likely end point will be that the cost to the customer will be the same, but the current position is that some of the expenses set out above will no longer be borne by the customer.
How much can I borrow if I take out a Spanish mortgage?
Of course, you may take the view that the process described above is something for your independent lawyer to take care of and what you really want to now is how much of the purchase price you can finance. Pre 2008 it was astonishingly easy to borrow money in Spain to buy property. Provided you understood what you were signing, it seemed that you could finance any purchase at all. The banks would find a way to lend to you, a practice that stoked the property boom with what we now know to be disastrous consequences.
The financial regulator, the Bank of Spain, and the banking industry itself have since narrowed the scope for people borrowing to finance the purchase of property. Provided the purchase price is not less than the valuation carried out on behalf of the bank, Spanish banks will typically lend up to 80% for a primary residence and up to 60% for a secondary residence. A number of Spanish banks will only allow you to commit a total of 35% of your net income to loan repayments, wherever in the world you are repaying a loan, no matter how high you score on your Experian credit report.
If you are considering purchasing a property in Spain using a mortgage and you have questions please contact us using our contact form, by telephone on 020 3478 1420 or by email at email@example.com