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Overview:
Unless you're fortunate enough to be in a position to buy in cash, you'll be looking for a mortgage (hipoteca) to purchase your Spanish property. Before you dive in, it's crucial to work out how you plan to pay for everything – not just the asking price of the property itself, but also all the extra costs involved, not forgetting the cost of moving and any necessary renovations.
You will need to consider the potential costs of changing money from pounds sterling into Euros. To purchase your property in Spain you will need to convert your pounds sterling into Euros at some point. Although the price of your new home in Euros will be fixed, the ultimate cost in sterling will vary depending on how exchange rates move. There are many options to consider such as buying all your euros at the outset for a fixed exchange rate (called buying “for spot”).
There are now hundreds of companies offering finance to buy Spanish property. This breadth of choice is good news for the investor but it's important to carefully consider your options before you commit to anything. For example, it may suit your interests to borrow as a “corporate entity” (i.e. by forming a company to buy your property) rather than as an individual.
You should consult with a foreign exchange specialist or an independent financial advisor who will be able to explain all the different possibilities.
Availability:
With hundreds of companies offering finance to buy Spanish property, the Spanish mortgage market is well developed and competitive, making it relatively straightforward for buyers – both domestic and foreign – to obtain mortgage finance. There are three main options for British investors:
- Taking a loan out with a Spanish bank secured against your Spanish property
- Releasing equity from your UK home to purchase your Spanish property using your UK property as security
- Borrowing from an offshore lender using your Spanish property as security
Spanish lenders:
- Spanish companies mainly offer variable rate repayment mortgages - interest only, endowment and pension-linked mortgages are not very common; there are no “guaranteed non-status”, “self-certification” or “buy-to-let” products available on the Spanish mortgage market
- Loan amounts will be calculated taking into account personal income from all sources although any expected rental income from the Spanish property will not included
- British buyers will need to provide a P60 from the previous tax year, 3 payslips (or other proof of current income), property identification (the “nota simple” is obtained in Spain and gives full property details) and a copy of your passport to obtain a Spanish mortgage
- Spanish mortgage lenders generally require insurance policies
- All Spanish banks charge mortgage arrangement fees that will generally vary between 1-2% of the total loan required; this charge will be deducted from your advance
UK lenders:
- The UK remortgage market offers a wider range of finance options than the Spanish mortgage market, including standard residential remortgages, buy-to-let remortgages and self-certified remortgages
- Requirements will vary but you will need to demonstrate how much unencumbered equity you have left in your house, the overall value of your property and your income (and in the case of buy-to-let remortgages your predicted rental income from the property)
Offshore lenders
- Offshore lenders offer similar mortgage products to Spanish lenders; loans tend to be made with fixed rates and “non-status”, “self-certification” and “buy-to-let” products are not available
- A key difference, however, is that offshore lenders offer both the capital sum and the repayments in most major currencies
- The assessment criteria of offshore lenders also are stricter than those of Spanish banks and normally you will have to permit a credit search to be made back in the UK
These three options are compared in more detail below.
General:
- Mortgages are made on the basis of the lender's valuation; this value may be less than the price the buyer ultimately pays for the property
- As a general rule, your monthly repayments should not exceed one third of your proven net income
Rates of interest:
Fixed or variable rates are available for both UK and Spanish loans. Fixed rates are always at a high rate of interest but you can fix the level for up to 15 years, thereby avoiding exposure to interest rate fluctuations. It is customary with Spanish mortgages to agree a fixed interest rate for the first year followed by a conversion to the variable and slightly higher European money-market interest rate (EURIBOR) which is thereafter adjusted on an annual basis. However, it is possible to convert a Spanish variable rate mortgage to a fixed rate mortgage at any time.
The Euro has historically been subject to lower interest rates than the pound meaning that Euro mortgages tend to be leant at lower interest rates than their sterling equivalents. Offshore lenders offer some very attractive short-term fixed rates.
Loan-to-value:
- Spanish lenders: In certain specific cases, Spanish companies will loan up to 100% of the value of the real estate, although the norm is to finance up to 80%, depending on age and income. Spanish lenders will normally offer similar levels of finance to foreigners and non-residents, although if they consider you greater risk, they may choose to lend no more than 60% of the property value, meaning you have to raise the rest of the money from elsewhere.
- UK lenders: Most UK lenders will loan between 75 and 96% of the value of your UK property as equity release to purchase a home overseas.
- Offshore lenders: Offshore lenders will loan up to 75% of the bank valuation or purchase price - whichever is lower.
Repayment periods:
Both Spanish and UK residential remortgages are offered over 5 – 30 years with 25 being the norm (depending on income and age). Buy-to-let UK remortgages offer the longest terms lasting for 75 years. Most Spanish lenders will assume the mortgage to have finished by the time you have reached the age of 70. Most lenders apply early redemption penalties throughout the lifetime of the loan.
Spanish mortgages, UK equity release and offshore mortgages compared
An obvious option for UK purchasers would be to sell their main home in the UK in order to purchase their new home in Spain. This might make sense if a UK purchaser is looking to relocate to Spain permanently. However, if there is even the slightest chance that a purchaser might wish to return to the UK in future, it would normally make better financial sense for them to hold on to their UK property if at all possible. The UK market tends to grow at a consistently higher rate than many other European markets and by not owning UK property, there is a strong risk that an expat wishing to move back to the UK at a future date will find themselves priced out of the market.
If a UK investor is not looking to sell their UK home and does not have sufficient funds available to buy in cash, then there are three main ways of raising finance to purchase property in Spain:
- A Euro mortgage from a Spanish lender secured against your Spanish property
- PROS
- The interest rate of Euro mortgages is linked to the EURIBOR (European Inter Bank Offered Rate) which has been lower than the Bank of England rate for the pound since the Euro was first introduced. EURIBOR rates also tend to fluctuate less than the Bank of England base rate.
- Your UK assets are protected as foreign banks have no right of repossession
- CONS
- Taking out a mortgage in local currency will expose you to the risks of exchange rate fluctuations, leading to fluctuating monthly repayments. However, if you receive a regular income in the local currency (e.g. rent) that is sufficiently high to cover your mortgage repayments, you will avoid the need to transfer money from sterling to euros and in the process avoid the risk of exchange rate fluctuations.
- It will be more hassle to raise finance in Spain rather than sticking with the system you're familiar with in the UK.
- Overseas mortgages are not under the protection of the UK Consumer Credit Act of the UK Mortgage Code.
- Set up charges for Euro mortgages are higher.
- Euro mortgages tend to offer less flexibility than their UK equivalents with a narrower range of products available.
- Equity release against your UK property, probably in sterling (euro remortgages not currently available for equity release products)
- PROS
- It will probably be simpler and less hassle to raise finance in the UK and you'll be using a system and lender you're familiar with.
- UK mortgages will fall under the protection of the UK Consumer Credit Act of the UK Mortgage Code unlike their Spanish equivalents.
- The initial set up costs will be lower as you avoid the cost of setting up a Euro mortgage.
- UK mortgages tend to offer more flexibility than their Spanish equivalents with a broader range of products available.
- Taking out a sterling mortgage will insulate you against the risks of exchange rate fluctuations.
- CONS
- The Bank of England base rate has always been higher than the European Inter Bank Offered Rate (EURIBOR) since the Euro was first introduced and EURIBOR rates also tend to fluctuate less than the Bank of England base rate. Consequently, interest rates on sterling mortgages are generally higher than those of euro mortgages.
- Your UK home is forfeit should a problem arise with your mortgage repayments.
- You will need a substantial amount of unencumbered equity (i.e. the difference between what your property is worth and what you will owe on your mortgage) in your UK property or be able to show other significant financial resources such as income.
- Offshore lenders offering finance in a range of currencies secured against your Spanish property
- PROS
- Offshore mortgages are similar to Spanish mortgages but they offer the possibility of taking out a mortgage and making repayments in most major currencies.
- CONS
- Offshore lenders demand a lot more stringent proof of financial standing and will usually include a UK credit check as a pre-requisite.
You should consult with a financial advisor who will be able to talk you through your options.
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