Planning on applying for a mortgage to enter the property market in Spain?
This Quick Guide will help you determine which mortgage loan best suits your property needs in Spain.
Knowing the terms of the mortgage to buy a property in Spain will help you negotiate a fairer loan.
While it might feel a tad daunting, getting a mortgage loan to buy a property in Spain is a very common process among overseas buyers.
Given the significant financial outlay involved in buying a home, many citizens usually resort to financing options.
Financial entities have a range of different products at their clients’ disposal. It is important that these products are clearly understood and thoroughly compared before making an informed decision.
The following information will help you successfully negotiate a mortgage loan in Spain.
What should you look for to determine which mortgage loan best suits you in Spain?
INTEREST
This is the price paid for the loan – it can be fixed or variable.
In the second case, most mortgages tend to have an interest referenced to the Euribor plus a differential that it’s added to the interest. The higher the interest, the more expensive the loan will be.
RETURN TERM
This is the period the bank expects the money to be returned within. Most banks offer a maximum term of 30 years.
FINANCING
Financial entities impose a series of limitations to loans that exceed a certain percentage of the appraised value.
MORTGAGE COMMISSIONS
There can be several different commissions in Spain, most of them are regulated by The Real Estate Credit Law. These are:
- Opening commission:
The Real Estate Credit Law does not impose any limitations on this commission, but it establishes that it will be the only commission that the financial entity may charge when contracting a mortgage loan. This eliminates the possibility of being charged a “study commission” as was the case before.
- Commission for early repayment:
This is the commission your bank is entitled to charge you if you decide to return your loan partially or in full before the agreed time.
For fixed rate mortgages, the commission may not exceed the amount of the loss that the lender may suffer with a 2% limit of the advanced capital during the first ten years and a 1.5% limit from the eleventh year.
For variable-rate mortgages, the commission may not exceed the amount of the loss that the lender may suffer with a 0.25%limit of the anticipated capital during the first three years or a 0.15%limit of the anticipated capital during the first five years.
- Novation Commission:
Whenever a fixed interest rate replaces another variable for the remainder of the loan, the early redemption fee may not exceed the financial loss suffered by the lender, with a limit of 0.15% of the capital anticipated during the first three years of the loan.
After this period, the lender will not be able to demand any commission at all.
MORTGAGE CLAUSES
These clauses establish the conditions that can alter or limit the operation of your property mortgage in Spain.
- Ground clause:
The Real Estate Credit Act nullifies the “floor clauses” as it specifically prohibits the application of a minimum interest in mortgages at a variable rate.
It also establishes that the remuneration interest cannot be negative (the financial institution cannot pay you money for the loan).
- Anticipated expiration clause:
With respect to the early maturity clause, it is allowed by law to apply this clause for non-payment when 12 months or 3% of the capital is owed during the first half of the loan, or 15 monthly payments or 7 % of the loan during the second half of the loan.
- Subrogation clause.
This clause applies especially when the property is purchased directly from a developer or builder, but it is unusual among individuals. Replacing the mortgage implies that all the provisions of the mortgage loan subscribed between the seller and the banking entity will be applicable as soon as the subrogation is signed unless expressly stated otherwise. Consequently, when it comes to subrogation, the original loan will also have to be analysed in detail.
ADDITIONAL GUARANTEES.
Certain mortgages require guarantors to provide or mortgage another property.
EUROPEAN STANDARDISED INFORMATION SHEETS (ESIS).
This document – which must be issued to you by the financial institution – contains all the information pertaining to your mortgage in Spain to buy a property.
It has a binding offer character for a minimum of 10 days. You must also be provided with the Standardised Warnings Sheet.
What kind of information will your ESIS include?
- Identification of the lender and the commission s/he receives.
- Amount, duration and currency of the granted loan with information about the potential fluctuations it may have if the loan is signed in a currency other than the euro.
- Type of interest. Including the loan repayment schedule and the total amount to be reimbursed.
- Value of the property and the percentage of the value granted in the loan.
- Periodicity and number of payments. Whether it would be paid monthly, quarterly, etc. and the total number of instalments to be paid.
- Amount of each payment: How much will you have to pay for each instalment and when and how can this amount change. If it is a variable rate mortgage, it must specify for how long it will be fixed and how often will the instalments change.
- A graphic illustrating the reimbursements and early repayments – the applicable conditions and commissions if the return of the loan occurs before it ends.
- A clear explanation of the consequences for the borrower in case of non-compliance with the loan requirements and conditions.
- Elements of flexibility. The lender will explain the possibility that the credit can be transferred to another lender and the conditions under which this option can be exercised.
- Rights of the borrower. Two of them being: the right of withdrawal and the right of portability where subrogation is included.
- Claims. The address where you can exercise your right to complain will be clearly indicated. The Standardised Warnings Sheet will also be provided by the bank and it will detail the clauses and mortgage expenses.
Conditions of Mortgages in Spain to citizens of countries outside the euro zone.
With the new law in place, the borrower has the right to request that the mortgage in Spain be converted into his or her local currency at any time.
Should the bank fail to comply with the request of the mortgage, “the nullity of multi-currency clauses” will apply as textually indicated by the law. Repayments will then be made in the currency in which the mortgage receives most of his or her income.
For this reason, some Spanish banks are already offering mortgages in foreign currency to purchase a property – for example, a bank in Spain will offer a mortgage in British pounds.
Article 20 of the Real Estate Credit Law allows future foreign mortgagees from countries outside the euro zone to change their mortgage to another currency when two specific conditions occur:
- The currency in which the borrower receives the greatest part of his or her income or in which he or she has the majority of assets to repay the loan with, as established at the time of the most recent solvency assessment regarding the contract of the loan.
- The currency of the country where the person may have moved for employment reasons. For example, if you British and work in Switzerland, you can ask to have the mortgage transferred to Swiss francs.
What conclusions can be drawn about mortgages issued to buy property in Spain?
A mortgage loan is the transaction by which a financial institution offers borrowers a certain amount of money with a relatively low interest rate in exchange for them mortgaging the property they are purchasing.
If a borrower is unable to fulfil his or her repayments, the bank will be able to sell their property at public auction.
Keep in mind that – unless it is agreed to it in the public deed – giving a property to a bank does not automatically free the borrower of his or her debt if this is greater than that obtained from the sale.
For this reason, the mandatory valuation incorporated into the deed has become so important, as it determines the market value of the home.
Knowing the terms of the mortgage will help you negotiate a fairer loan.
However, if you truly want to feel safe and guarantee the mortgage that has the best possible conditions for you, and if you want the loan to be in your own currency, at Fuster and Associates will be delighted to lend you a helping hand.
Our financial department specialises in finding the most suitable mortgage loans and negotiating the best terms for foreign nationals purchasing properties in Spain.
So, don’t dive into the Spanish property market on your own.
Get in touch and book your free assessment session today!
Main image: Pink Paradise on the Costa Costa Blanca ©Pink Paradise.
We want to help you navigate all the legal complexities that come with your home buying in Spain, but this article is legal information and should not be seen as legal advice.
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