Spanish Mortgage: a guide to getting a mortgage for overseas property

Therе are no restrictions for foreigners on buying property in Spain, but like other buying processes, the process of obtaining a mortgage here has its peculiarities. It is not hard to get a mortgage, but there are things that require extra attention.

We recommend you apply for a mortgage after you've selected the property and have a reservation contract in your hands, as it is an important document the bank will ask you for. Usually, the bank considers the application for a mortgage loan for a foreigner during two to five weeks.

All documents, that are in another language than Spanish or English, must be translated into Spanish by a sworn translator. If the property is acquired in the shared ownership, all documents should be provided by each of the future owners.

Any additional documents confirming the financial viability of the borrower are welcomed by the bank. These can be extracts from private pension funds, investment funds, certificates of ownership of securities, etc. Remember, the more stable your economic position looks in the eyes of the bank, the more willing they will be to issue the most profitable mortgage loan for your conditions.

It should be noted that a citizen of another country who buys Spanish property does not need a guarantee for a mortgage loan, and this is the main difference in the procedure for obtaining a mortgage between residents and non-residents of Spain. Despite this solid advantage, the maximum amount requested can be no more than 70% (usually it is 50-60%) of the cost of housing, while a Spanish citizen can qualify for 100% coverage by a bank. Your monthly payments must not exceed 35% of your monthly income.

In reality, banks are more willing to issue loans for housing from 100,000 euros, since it is more liquid than their cheaper counterparts. The maximum amount is limited only by the borrower's ability to confirm his income.

To decide the amount of required mortgage the buyer should know how much they are able to pay each month, so they must not forget the interest rates that will be applied to the monthly installments. It is true that these loans have lower rates than those of other forms of financing and it is due to one reason, which is that housing itself is a guarantee for the bank.

The average rate on a mortgage loan in Spain is from 2.44 (historically low in September 2020) to 3.5%, a loan can be obtained for up to 30 years with the possibility of early repayment. The maximum that residents of the European Union can get is a loan of 70% of the property price. A loan guarantee is not required for foreign mortgages.

Spaniards are required to sign a loan guarantee, but they have the possibility to get a loan of 100%! In the case of non-residents, it is generally higher than for residents. The fixed rate is around 2.5% for 20 years.

The same rules apply for non-residents, as for the foreigners, except for one note, which is that the maximum loan amount is 60% of the cost of housing for non-EU citizens.

Since November 2018 banks are obliged to cover all the expenses connected to the mortgage arrangement, such as Gestória, Notary, Stamp Duty, and Registro, except for the property valuation. As for January 25th, these costs were ordered to be shared between borrower and lender. So to say, the order of payment is still in discussion, which is confusing for international mortgage lenders.

You must pay the Transfer Tax (ITP) if you are thinking of buying a home or any other second-hand property. According to the Autonomous Community in which the property to be acquired is located, a tax will be applied, which also depends on the nature of the property, its value and some characteristics of the purchaser (age, for example). The fee is 6-11%, depending on the rates of each Autonomous Community.

Valuation: A home that is to be mortgaged will be appraised by the financial institution. This valuation is mandatory by law and must be carried out by an appraised entity registered with the Bank of Spain. It serves to determine the real market value of the property. Its cost can be between 250-450 euros, depending on the entity and the final value of the property. The valuation report is valid for 6 months from the date of issue.

The opening commission is usually between 0% and 2% of the loaned capital (as agreed with the bank). This new norm does not prohibit the collection of this commission although it does establish that this fee will only be accrued once and includes all the expenses of study, processing and granting of the loan or other similar expenses.

In Spain, there is a huge variety of mortgage choice, each with its own pros and cons, which requires the buyer to devote enough time and effort to this issue if they want to find the best offer.

For many non-residential buyers, the best solution may be to use a mortgage broker who would specialize in Spanish mortgage for the foreign property. Usually, mortgage brokers in Spain provide the following services:

A good Spanish mortgage broker can be of great benefit, but if the buyer has a good credit history and they can spend some of their time analyzing the conditions for granting mortgage loans in Spain, then they may not need an overseas mortgage broker. A direct appeal to credit institutions saves the brokerage commission in the amount of 0.5% -1% of the cost of the loan.

Home insurance is one of the most common extra costs when facing the payment of the mortgage. The law requires that homes with mortgages have insurance. It will cost you 250-350 euros per year.

Banks usually try to sell their own insurance when taking the mortgage and it is likely that they offer better deals if different products are contracted with it, such as home insurance or life insurance. Important to note, that life insurance is also required in case of a mortgage, you usually get it one time when receiving a mortgage.

As banks lose their profits in case of early repayment of a loan, a penalty is provided. According to the new law, that is in power since 2018, the fee has declined and is as follows:

• In case of variable rate mortgage, the early repayment fee is 0.5% of the amount repaid in advance if the payment occurs in the first 3 years of the mortgage contract, 0.25% from 3 to 5 years and free of charge after 5 years of the contract;

• In case of a fixed rate mortgage, the penalty for early repayment is 4% of the amount paid ahead of time in the first 10 years. After this period, the borrower pays 3% of the fee.

The commission is calculated from the amount of money paid ahead of schedule for both fixed and variable rates.

There are two types of subrogation:

If you want to buy the property with a mortgage attached to it, there is good news for you: the costs of debtor subrogation (transfer of a mortgage to another owner) were reduced since 2018. Banks charge a commission of 0.25% for changes made before the third year of the mortgage; commission after 3 years is zero. In addition, in this case, you will have to pay the Notary fee of 30 euros, and registration fee - 24 euros.

If there is an opportunity of subrogation, you should be aware of the following: debtor subrogation means you are ready to accept the current conditions of the mortgage like the duration of the loan and its interest rate, which may not be the best compared to other banks. Creditor subrogation will be discussed further.

On December 23rd, 2015, the Supreme Court issued a judgment declaring the practice of imposing all costs to the borrower abusive. Currently, only those who signed the mortgage loan (or will sign) between December 2011 and December 2019, would be able to claim a refund.

Regarding the valuation costs of the property, the borrower can recover them if there was a valid valuation before the mortgage (made by an approved company) but the bank rejected it and forced the borrower to hire services of another agency to valuate housing again. In this case, the borrower can only file an ordinary claim with the bank or report the case to a court specialized in abusive clauses.

A remortgage is a change in the main conditions of your mortgage. This may include the amount of the loan, duration of the repayment period, interest rate and repayment schemes.

There are two main ways to remortgage in Spain:

The most effective way to improve the conditions for a mortgage is usually to reduce its interest rate. The cost of such a renewal will include the cost of a notary and registration fee, as well as a penalty from the previous bank in the amount of 0.25% (as for today) and the commission for opening a mortgage in the new bank.

Banks usually propose special offers to attract new customers, inviting them to reissue an existing loan without any associated costs. At the same time, it is important to carefully study conditions in order not to fall for marketing tricks.

The second option of a remortgage, which is cancellation and reopening, is expensive because it includes the fee for mortgage annulment (usually around 0.5% of the remaining loan) the registry fee for cancellation, the fee for opening a new mortgage, the notary and the registry fee for opening a new one.

The first thing you should know when selling a mortgaged home is how much money you spent on your property, how much mortgage is pending and the amount you will be able to receive when selling the property.

In order to know when it is better to overpay the mortgage, you must take into account not only your economic situation but also the market situation, mainly the value of the Euribor.

A priori, when the interest to pay is very low as now, with a negative Euribor since 2016, it is not worth repaying a mortgage, because the savings you can get is lower than when the interest rate is high.

In financial terms, it is not profitable, but it can be interesting if you have the right to tax relief. If you have signed the mortgage before January 2013 you can deduct in the income tax return up to 15% of the contributions made during the year, with the limit of € 9040 or € 18080 if there are two holders and the declaration is made separately. The maximum savings you can get with the tax credit is € 1356. In these cases, it is important to overpay to reach the maximum that you can deduct in the income statement.

So, to know if the mortgage is worth overpaying, it is best to do the following calculations, keeping in mind the early cancellation fees, described above:

With this simulation, it is seen as when the interest to pay is higher, the interest saving that is achieved with the early repayment of the mortgage is higher. Taking into account that in the first years is when you pay more interest it is more profitable to make amortizations in those years, but calculating if the savings compensate the commissions, which are higher in the first years. However, no commission is paid from the sixth year.

However, we must also assess that if the interest paid on the mortgage is less than what can be achieved with investment then it is not advisable to overpay. As a conclusion, you must remember that in order to cancel the mortgage in advance you have to assess the commission that is applied and if it compensates the interest savings that you can get.

It means that if you do not pay the mortgage on time, the bank can take your property because the mortgage is a loan, secured by the purchased property.

There are several reasons for choosing a mortgage in Spain compared to a mortgage in a home country.

First of all, taking into account fluctuations of the exchange rate, it is better to have the real estate and its mortgage in the same currency, as it lessens the risk of overpayment and prevents other currency inconveniences. Foreign currency mortgage is not the best choice due to this reason.

Secondly, it would be wise to have monthly mortgage payments in the same currency as the rent if you are going to rent out your property and use the income to pay off the mortgage.

On the other hand, the cost of opening a mortgage in Spain may be rather high, taking into account the notary, registry, taxes, and other organizational costs. But with the latest court decision, these costs are divided between the borrower and the lender, so from now on it may be beneficial.

How buy to let mortgage works? The property for rent should pay off, i.e. mortgage loan is paid by rental income. Minimum deposit for a buy to let mortgage is around 20-25%. Banks consider buying a property for rental riskier than a purchase of the own residence.

Can I get a buy to let mortgage? Unfortunately, it is not possible to obtain this type of loan in Spanish banks. But in some exceptional cases, experienced investors may be given an offer for this type of mortgage.

There are Spanish banks that are seeing a vein in the granting of mortgages for foreigners and are creating teams specialized in this type of client, where they include advisory services so that they have the guarantee of the notarial process and the Land Registry.

Among the most proactive entities when granting mortgages to foreigners are Santander, Ibercaja, Bankinter, Hipotecas.com, Abanca, and Bankia. Some of them have specific services for operations with foreigners, while others are betting on this new niche given their strong presence abroad or on the Spanish coast, where most of the transactions are carried out. For example, Santander has a strong presence in the United Kingdom, Portugal, Poland, Mexico, Brazil, Chile or Argentina, while Bankia has reinforced its presence in the Mediterranean region after the integration with BMN bank.

Most banks in Spain are ready to offer a wide range of mortgage programs in combination with an individual approach to the client. However, the decision should take into account a number of factors:

According to Registradores, the coast and the islands are the regions with the most purchases, since the houses are usually second homes to enjoy the holidays. The most common customers are usually the British, the French, the Germans, the Belgians, and the Swedes, while the provinces most in demand were Alicante, Tenerife, Baleares, Girona, and Malaga in 2017. In all of them, foreigners account for more than 30% of the mortgages. What is more, Santander Spanish mortgage was among the most popular choices.

The best way out in such a situation would be to visit several banks in order to compare the proposed conditions for overseas mortgages and choose the most suitable ones. In order for the analysis to be complete, it is necessary to take into account such parameters as loan size, terms, rates, insurance, additional services, and their cost. It is advisable to use mortgage calculators, which are available in all banks, when conducting the analysis. Doing this will allow you to calculate the amount of repayments depending on the conditions of the mortgage program.

Variable mortgages are an attractive option for those looking for loans for 10-20 years. Now it is a good time for a variable mortgage since the Euribor is about to turn negative for the 4th year in a row. Financial institutions do not give priority to these loans since the money they earn today is not very big, so lately their main focus have been fixed mortgages. Despite this, variable mortgage can be a good one for those who now seek to pay a small fee.

The Freedom mortgage of Banco Mediolanum offers financing of up to 80% of the property value for a maximum term of 30 years. With fixed rates of 1.99% TIN the first year and Euribor + 1.10% from the second year + a variable APR of 1.28%. In case you take 150,000 EUR, the monthly payment is 484 EUR.

Sabadell also has a very attractive option, the TIN of the first year of its 30-year mortgage is 2.15% and after that period it's 1.35%. In the case of a mortgage of 150,000 euros for 30 years, the monthly fee will be about 536 EUR.

For its part, Coinc offers an interest rate of 1.89% the first year and 1.10% the second with an APR of 2.14%. Monthly payment is 545 EUR.

ING created several options of the variable mortgage. On the one hand, if the mortgage is contracted by direct debiting the payroll and contracting the home and life insurance offered by the rates, they offer APR 2.65%, 1.99% TIN the first year, and after that Euribor + 0.99%. Without hiring listed products the TIN after the first year will be at Euribor + 1.79%. The maximum term of this mortgage is 40 years. If the client opts for this loan for a house of 150,000 euros, monthly payment will be 584 euros.

All in all, Spanish banks are loyal to different clients. Some are more favorable of British citizens, others for Ukrainian citizens, etc. It depends on the region where you are planning to take a mortgage, as well as, on the branch. Your real estate agent should give you assistance with choosing the bank, accounting for the up-to-date international mortgage plans.

If the bank of your mortgage makes you a similar or more advantageous offer, you are no longer obliged to accept it.

The maximum fee amount for a switch is now 0.15%, and only the first 3 years are charged.

Banks may terminate the contract ahead of schedule in order to request recovery through court, subject to the following conditions.

The maximum interest rate for late repayment may be 3 points higher than the rate of the mortgage loan.

Now banks, while arranging mortgage, cannot oblige clients to conclude contracts with them for real estate or health insurance, etc. But at the same time, they can offer more favorable mortgage terms when concluding contracts for several services at once.

Banks may also require you to get home or life insurance. But you do not have to do this in a bank that issues a mortgage.
Now for all mortgage loans the minimum rate is 0%.

FEIN ­­– European standardized information sheet, which will allow to compare the proposed loan with others in the European market;
FiAE – a standardized warning card that presents the main risks and scenarios of estimated expenses.

The mortgagee must consult the notary within 10 days before signing the contract.

During this consultation, it will also be necessary to answer the test questions; without this procedure, no notary can assure you of the contract.

All contract clauses that are contrary to the new law will be declared invalid, and there will be no statute of limitations for reporting. A new legal body will be created to handle complaints and claims on mortgage loans.

For those who received a mortgage in a different currency, it will be possible at any time to convert it into euros. At the same time, the bank is obliged to notify the client about the increase in debt due to the growth of the currency against the euro.

New property loans recovered remarkably well after the COVID-19 outbreak in March-June 2020 , but not enough to make up for the battle lost to the coronavirus.

In 2020 over 251,000 new mortgages were issued, and the year ended with 2.7% more loans in December than in 2019, the same month. But this was due to the recovery of the sector in the 2nd half of 2020. Summing up, the Spanish mortgage market ended the year losing 7.6% in volume and returning to 2017 level.

The average residential new loan value in December 2020 was €147,600, which is around 5% more compared to December 2019.

Because Euribor has reached a historic low for 22 years, variable mortgages have become more beneficial. Payments for variable rates are reduced by several hundred euros per year (depending on the amount of the loan). Experts say that the indicator is going down due to the European Central Bank's policy of monetary stimulation of local economies due to the consequences of the pandemic in order to ease tensions in the banking sector.

In times of economically complicated context such as the one left by the covid, experts believe that banks may tighten their criteria for granting mortgages and become more selective. This is especially true in the case of second homes or residential properties, a niche that presents more risk for banks.

The banks are now especially demanding in granting mortgages for non-residents with a currency other than euro, and this is due to the new mortgage law, which allows the customer to change the currency of payment at any time. This situation is complex for banks, as it involves taking on a lot of risk due to currency fluctuations, which has led many banks to limit themselves to granting mortgages.

But in reality, residents of European Union, the UK, Scandinavian countries and the United States have higher chances to get loans, thanks to the stable economies and friendly monetary policies. But if a person comes from some other country, everything depends on the agreements that exist between that country and Spain.

However, many non-residents of mentioned countries do manage to obtain a mortgage. How can it be done? The most effective way is to involve a mortgage broker. The specialist will evaluate the applicant's profile and contact the banks that work best with the given type of applicants.