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PROPERTY

Spanish mortgages: Ten things foreigners should know before getting one

Although Spain's new mortgage law are good news for all prospective buyers, there are important things to keep in mind if you’re applying for a mortgage for a property in Spain, especially when differentiating between resident and non-resident borrowers.

Spanish mortgages: Ten things foreigners should know before getting one
The beautiful village of Valldemossa on the Balearic island of Mallorca. Photo: Patrick Baum/Unsplash

Favourable new mortgage laws for all

In the past, Spain’s mortgage laws tended to side with the banks and were often punitive to borrowers.

But in 2019 the country rolled out new “hipoteca” (mortgage) laws with favourable conditions for nationals and foreigners (resident and non-resident).

These include longer default periods before repossession, more mortgage fees to be paid by the banks and the green light for borrowers to convert foreign currency denominated mortgages into euros.

FIND OUT MORE: How Spain’s new mortgage laws could affect homeowners

Non-residents pay more than residents

Non-residents will pay higher interest rates than foreign residents in Spain, “around 2.5 percent for 20 years” according to Ricardo Gulias, director of Spanish mortgage consultancy firm Tu Solución Hipotecaria, and a variable rate of 3 percent added to the Euribor index.

The reasoning for this is that non-residents are buying a second home and don’t offer added guarantees such as life insurance or a salary paid into that mortgage-lending Spanish bank.

Banks are also more likely to offer only a fixed type of mortgage to non-residents.

Non-residents get less financing

If you spend less than 183 days in Spain you are less likely to get financing for a Spanish mortgage and will have to put a bigger amount down initially.

Whereas residents will usually be lent around 70 to 80 percent of the total property amount to be paid and get better interest rates, non-residents can only expect a Spanish bank to cover 60 percent of the cost.

Again, this is due to the fact that if Spanish Banks pursue assets in the event of a default, the only thing they could have access to would be the property in Spain.

Credit rating required for non-residents

As an extra guarantee, the bank is likely to ask you for a credit rating statement from your bank in your country of origin.

Experian in the United Kingdom and Transunion in the United States are two companies that provide these services.

Fuerteventura in the Canary Islands is a popular place for foreigners to buy property in Spain. Photo: Niklas Schoenberger 

Longer repayment periods for residents

Unfortunately for non-residents, Spanish banks are far more likely to only give mortgages that are no longer than 20 years, whereas for residents it’s up to 40 years, so their monthly payments are likely to be considerably higher.

Higher taxes when selling for non-residents

Here’s another important factor to keep in mind when calculating how much money you will need to borrow.

When you buy a property in Spain, you need to take into account that the property transaction cost will be 10-12 percent of the property value (it was up to 15 percent prior to 2019). 

This applies to Spanish nationals and foreigners, whether they’re residents or not.

When it comes to selling a property, non-resident sellers have to factor in the Non-Resident Income Tax (IRNR) and the Tax on the Increase in the Value of Land of Urban Nature (IIVTNU or municipal capital gain tax).

This 3 percent IRNR retention on the selling price goes directly to the Spanish Tax Office whereas municipal taxes are usually decided on a more local level. 

READ MORE ‘It’s absurd’: How Britons who let out properties in Spain could see taxes triple after Brexit

Nationality matters for non-residents 

There are reports that when it comes to getting a mortgage from a Spanish bank as a non-resident, your home country can play a big part as to whether it’s approved.

According to IMS Mortgages, prospective buyers from the EU, the US, Australia, New Zealand, Hong Kong and Singapore can get financing for a mortgage relatively easily.

Whereas mortgage applicants from the Middle East, India, China, Russia and Africa struggle by comparison.

At first, this comes across as a discriminatory policy but according to Ricardo Gulias of Tu Solución Hipotecaria (Your Mortgage Solution) “banks have started specialising in operations with clients from north, central and eastern Europe and China”.

This suggests that if there is more demand for property in Spain from emerging economies, more bureaucratic barriers will be broken down for these nationals.

Non-residents have to translate and apostille documents

If you’re not working and living in Spain, some of the documents you’ll need to provide for your mortgage application will no doubt be in another language, and as with everything else that’s official in Spain that’s a big no-no.

Aside from having to pay a sworn translator to do this, some banks will also require you to get the Hague Apostille stamped on some of these documents as an international authentification.

However, residents do have to get documentation notarised when applying for a mortgage as well.

You will also need to get a “Número de Identificación de Extranjeros (NIE) , the Spanish identification number for foreigners, even if you are a non-resident.

Easier to shop around if you’re a resident

Some of Spain’s smaller banks won’t take the risk with non-residents, meaning that choices are more limited.

However, larger banks such as Banco Santander, BBVA and CaixaBank do offer mortgage deals to non-residents, and it’s also possible to get a mortgage for a Spanish property through an international bank such as Chase or IMS or by reaching out to a mortgage broker who specialises in foreign clients. 

It’s not all bad for non-residents borrowers

Despite the fact that mortgages for non-residents are clearly not as favourable as for residents, there are still some positives for this group.

The initial costs and charges related to the mortgage contract are paid by the bank, so the mortgage costs work out cheaper.

The only two charges that can be assigned to a non-resident client are the property appraisal (avalúo de la propiedad ) and the settlement fee (tarifa de acuerdo), and some Spanish banks pay for these as well.

Non-resident borrowers who aren’t from the euro zone can also pay their mortgage in the currency of their country at the exchange rate applicable at the time, if they stipulate it in the contract. 

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MORTGAGES

How Spain will help homeowners with rising variable mortgage rates

The Spanish government and the country's banks have agreed upon a set of measures to help protect more than one million low and mid-income families from rising variable mortgage rates.

How Spain will help homeowners with rising variable mortgage rates

The plan was announced on Monday November 21st by Spain’s Ministry of Economic Affairs, which said that the agreement “will preserve financial stability” in the face of the sharp rise in interest rates that have been applied by the European Central Bank since August.  

The agreement still has to be brought before the Spanish Cabinet on Tuesday November 22nd, before its final approval.  

The deal will help alleviate the effects that high interest rates are already having on variable mortgage bills.  

For example, a person with a €150,000 mortgage at a variable rate to be paid over 30 years spent €448 in October last year, but the same mortgage this October (2022) was €675, which is 50 percent more.

Three in every four mortgages taken out in Spain are variable rather than fixed. 

READ ALSO: Why mortgage payments in Spain could increase by up to €120 a month

What are the new measures and who will they help?

The agreement will help families who earn less than €25,200 per year. They will be able to benefit from an improvement to the Code of Good Practices, which the banks agreed with the former right-wing Rajoy government in 2012.  

The code is currently limited to those with a maximum income of €24,318, but the new agreement aims to increase this.  

Those who benefit from the improved code will:

  • Be allowed to pay only the interest on their loan for five years.
  • Will have the maximum interest on their loan limited.
  • And will have the period in which to pay back the loan extended to 40 years. 

If after these three measures are applied, families are still having to pay 50 percent of their household income to mortgage repayments, then they will be allowed to request a reduction from their bank. Keep in mind though, the bank can refuse this request.  

Finally, if this is not enough or the bank refuses, families will receive a loan in order to help pay their mortgage bills to the bank.  

Previously, families could only benefit from the Code of Good Practices if there had been a significant alteration in their financial situation in the past four years.

This meant that many people were not eligible because the problem had come from the increase in mortgage rates, rather than a change in their own financial situation.

The new measures will also reduce the maximum interest rate that households who benefit from the code will have to pay. Specifically, the maximum will be reduced from 0.25 percent plus the Euribor to -0.1 percent plus the Euribor.

Conditions for new homes will also be included but these will be less favourable. The time in which they have to repay the interest will be reduced to two years instead of five and they can extend the repayment period to a maximum of seven years.

READ ALSO: How to get a mortgage in Spain if you don’t have a job contract

What effect will this have on mortgage repayments?

Spain’s Ministry of Economic Affairs believes that a household with a mortgage of €120,000 and a monthly payment of €524, will now see their bill reduced during the five-year grace period by more than 50 percent down to €246.

What about mid-income earners who don’t qualify?  

The measures will also introduce a new Code of Good Practices that focuses on the middle class. The objective is that these families will have “a more gradual adaptation” to the new interest rates.

This will be extended to those who earn up to €29,400. In addition, families who allocate more than 30 percent of their income to mortgage repayments will be able to benefit from it, although they will have to demonstrate that their mortgage burden has risen by at least 20 percent.

For these middle-class earners, the banks must offer a freeze on payment increases for 12 months, so they will continue to pay the same bill for one year.

Once that year has elapsed in which the instalments will not be able to rise, they will be offered a lower interest rate on those twelve months that have been frozen, which they must pay at the end of the loan period.

They will also have the possibility of extending the term of their mortgage by seven years.

Is there any other financial help for those struggling to pay their mortgages?  

Yes, other new measures being introduced include expenses and commissions being reduced to facilitate the change from variable to fixed-rate mortgages.  

READ ALSO: How to change from a variable to a fixed mortgage in Spain

Fees for early repayment and changing your mortgage from variable to fixed rate will also be eliminated during 2023.  

The two Codes of Good Practices are expected to be available from January 1st 2023, and will be voluntarily adhered to by financial institutions. However, if the banks sign the agreements, they will be obliged to comply.

The first Code of Good Practices approved in 2012 was signed by almost all credit institutions in Spain. 

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