MORTGAGES AND LOANS

A resident can borrow freely from outside Spain in any foreign currency for sums up to 1.5€ million without any authorisation provided the lender is not based in a ‘tax haven’. A home-buyer in Spain can therefore obtain a mortgage from a lending institution in any country and in any currency denomination. In practice it is different. Lenders are always reluctant to lend against a property located in another country for it is difficult to repossess a foreign property if anything goes wrong.

However, lenders in Britain are quite relaxed about a homeowner’s equity in their UK homes being used to fund the purchase of a second property overseas. Most people who are looking to buy overseas have a lot of equity. As long as the repayments are affordable, extending a UK mortgage should not be a problem. In the majority of cases a UK mortgage will be in the same currency as the borrower is earning. It is easier to arrange than an overseas mortgage and the costs of remortgaging in the UK will be less than those involved in arranging an overseas mortgage.

The Spanish banks too can be mortgage providers. Charges on a euro-denominated mortgage are calculated on a different basis to those on a UK sterling-denominated mortgage. Spanish mortgage rates are commonly quoted as Euribor plus a percentage. So for example a mortgage advertisement will state ‘Euribor + 1 per cent’. Euribor is the Interbank lending rate used across the entire euro zone. As such, it is used as a common benchmark for consumer borrowing across a wide range of loans including credit cards and mortgages.

The Spanish mortgage market

There are no building societies or their equivalent in Spain with the exception of a few of UK parentage. Spanish banks therefore have a captive market for the provision of home finance. Spanish mortgages are on a repayment basis with loan and interest both repaid by instalments. Endowment and interest-only mortgages are not known in Spain. The criteria for granting a Spanish mortgage are similar, but more restrictive than in the UK.

• The earnings of one or both purchasers are taken into account. Allowances are made for letting income.
• The property is valued not at market value, but at a rebuild cost per square metre. Most banks will not lend an amount whereby the monthly repayments are greater than 30 per cent of net disposable income.

• The maximum mortgage for a non-resident is around 60 per cent of the valuation and for a resident around 80 per cent.
• A combination of a low valuation based on rebuilding cost and a low mortgage based on that valuation means an actual mortgage can be as low as 40 per cent of the market value of the property.
• Mortgages are usually granted for a maximum of 15 years and repaid before age 75.
• A separate mortgage deed does not exist. The existence of a mortgage is stated in the escritura prepared by the notario.
• The cost of a new mortgage is around five per cent and one per cent for redemption. Life insurance for the amount borrowed is also required.
• When buying off plan with stage payments a mortgage will only be granted at final payment, in the presence of the notario, which means the size of the mortgage is also limited to the size of the final payment. As this can be 60 per cent it is no problem. If the earlier stage payments are more substantial, banks will offer a credit facility for these payments.

If personal circumstances change, it may be necessary to raise money on a foreign property. The Spanish mortgage market is much less flexible than the UK’s. Money is lent only in order to buy or improve a property. Once the property has been purchased, equity release is virtually impossible. So the only way to raise money on a foreign home is to sell it – and a forced sale is seldom on advantageous terms to the vendor.

However financing a property in Spain can offer more options than a straightforward mortgage extension on a UK home. Less risk is achieved by borrowing in euros. When currencies move, the asset will move in the same direction as the mortgage. Alternatively if income is in pounds, it is not a bad idea to have a loan in pounds as well, so any currency fluctuations will not change the payments.

Confused? Some people overcome this complexity by compromise, achieving a 100 per cent mortgage on a Spanish property, financing it by a 50 per cent mortgage extension on a UK property and a 50 per cent Spanish mortgage.

INVESTING IN SPAIN

It almost goes without saying that investments must only be made with a very good financial advisor, one who understands the taxation and investment regulations of Spain. Some financial advisors only offer advice in relation to their home country and write a disclaimer regarding the effect of their advice in Spain. This is of little help!

A variety of investments are available for the ex-pat in Spain. They are advertised in the weekly newspapers. In addition to conventional investments they range from dabbling in the futures market, buying up surrendered endowment policies and purchasing offshore unit trusts or bonds. Tempting these investments may be, but be warned that the ‘independent financial advisor’ is completely unregulated in Spain. Many such organisations simply sell financial products with little reference to a client’s needs.

It is important to check both the financial advisor and the investment product. How long the company has actually been in business, qualifications of directors, their experience in financial markets and what commission they charge, are key questions, plus how you get the money back should it be necessary. Deals often appear to be too good to be true; they advertise returns of 15 per cent. Such investments may return a much higher percentage, but they are really only suited to those who can afford to take a risk.

One issue facing investors, who have lost considerable sums of money through high risk investments, is legal retribution. The investment company probably will not be registered in Spain and the Spanish legal system is poorly equipped to sue someone in Belize, Bermuda or even Bournemouth.

Contrast that with the Financial Services Authority in the UK which publishes a list of unauthorised firms that target investors. Strangely, the nearest equivalent publication in Spain comes from the British Consulate who gives details of the latest ‘seams’.

Of course there is also tax to consider! It is clear that failure to disclose investment income is not a viable tax planning strategy. Information crosses borders more readily these days than ever before.

FURTHER INFORMATION

The magazines Spain and Living in Spain are published and sold in the UK. They are a valuable source of information. Money transfer organisations, banks, building societies and financial advisors advertise regularly. So do contributors on legal matters.

Financial advice in the UK: www.fsa.gov.uk

Financial advice in Spain: www.cnmv.es