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Spanish mortgages explained

Just like any advanced economy, Spain has a well developed mortgage market with a number of lenders offering a great variety of mortgages.

An overview of the Spanish mortgage market

Mortgages in Spain are offered by banks and savings banks (known as Cajas (or Caixas) in Spain) and sold either directly by the lenders or through mortgage brokers. Several international banks, including British banks like Barclays and Lloyds TSB, offer mortgages in Spain alongside the national banks and cajas.

And just like any other developed mortgage market there are big differences in the costs and terms of what mortgages are on on offer, ranging from the inflexible and more expensive to cheaper and more flexible deals.

Although the interest rate charged on mortgages is calculated as a function of the base rate set by the European central bank, beyond that mortgage lenders in Spain are relatively free to set the charges and terms of the mortgages they offer. This translates into significant differences between various mortgages available in Spain in terms of cost and conditions.

* Not only do Spanish mortgages vary in their attractiveness from bank to bank, they also vary considerably within the same bank, and even from branch to branch.

The following list gives you an idea of the number of mortgage lenders operating in Spain (this list is not exhaustive):

Mortgage lenders worth looking at in Spain

  • Banco Atlántico
  • Banco de Sabadell
  • Banco Guipuzcoano
  • Citibank España
  • Banco Bilbao Vizcaya Argentaria (BBVA)
  • Banco Pastor
  • Barclays Bank
  • Banco Santander Central Hispano
  • Banco Zaragozano
  • Deutsche Bank
  • Lloyds TSB España
  • Solbank
  • Banesto
  • ING Direct
  • Bankinter

With so many potential lenders, many of which who do not market Spanish mortgages to foreign buyers, it is difficult if not impossible for foreigners to find the best deal on the market. However if you don't shop around, or use a broker who shops around for you, it is highly likely that you will end up with a relatively expensive and inflexible mortgage that will cost you thousands of Euros more than you neccessarily need to pay over the lifetime of the mortgage.

Types of mortgages available in Spain

As in other countries such as the United Kingdom the vast majority of mortgages sold in Spain (to both Spaniards and Foreigners) are variable rate mortgages.

This means that mortgage repayments vary according to the base rate set by the European central bank (this has been set at 2.00% since June 2003). Borrowers with variable rate mortgages cannot be certain what their re-payments in the future will be . If the interest rate falls they will pay less, but if it rises they will pay more.

Most lenders also offer a fixed rate mortgage. which tend to have higher interest payments in the short term but if interest rates rise a fixed-rate mortgage holder might end up paying less than would be the case with a variable-rate. At the very least they give borrowers the ability to know exactly what their mortgage repayments will be for a period of time.

Some mortgage lenders also offer a mixed mortgage that involves a certain period (for instance 5 years) of fixed interest payments and a floating rate thereafter.

And recently some Spanish mortgage lenders have started offering an interest only mortgage under which borrowers only pay interest on the loan and then return the capital either at the end of the mortgage or at some point in the future during the lifetime of the mortgage. This kind of Spanish mortgage can be very interesting for foreign investors who plan to rent out their Spanish property to cover mortgage costs and do not plan to hold their property for more than 10 years.

Mortgage lenders in Spain have also have increased the lifetime of mortgages that they are prepared to lend (also depends upon the age of the borrower). Where as in the past most Spanish mortgages were for between 10 and 20 years now most lenders offer mortgages of 30 years or even longer. Longer Spanish mortgages reduce the size of monthly mortgage repayments and therefore stimulate demand for property by making it accessible to a wider market. This fact, along with the reduction of interest rates to historical lows and the number of foreigners buying property in Spain, have been primary drivers of the Spanish property boom in recent years.

How do lenders price their mortgages?

Spanish mortgage lenders will decide how much to lend you and on what terms according to your personal and financial profile. They will want to know how much you earn and what your other financial commitments are (your personal balance sheet - assets and liabilities). As a general rule of thumb they will lend according to earnings multiples whereby your mortgage repayments do not exceed 35% of your net annual income. However if they think you have excellent career prospects and that your income is very likely to increase in the future (something that you would have to convince them of) then they may be prepared to lend you more that the general rule would imply. Also the younger you are the more they may be prepared to lend you (all other things being equal) because they assume that you have a longer working life in which to pay off your mortgage in Spain.

They also take into account what kind of a property you want to buy. If you are borrowing for a Spanish holiday home they will consider this a more risky loan than if you are borrowing for your primary residence. This is because they assume that if you get into financial distress you are more likely to default on your holiday home rather than your primary residence.

Mortgage terms

In general Spanish mortgage lenders don't like to lend more than 60% to 70% of the value of the property to foreign buyers of Spanish property. They consider foreign mortgage applicants as awkward because their risk profile is harder to gauge than that of Spanish clients and because language can often be a barrier (almost all of the documentation that lenders prepare is in Spanish). Nevertheless this is starting to change as Spanish mortgage lenders realise how important foreign buyers of Spanish property are and how big the market is. And in the meantime a good Spanish mortgage broker can get foreign buyers a Spanish mortgage with a loan-to-value of up to 80% (depending upon the circumstances of the applicant), with the lowest costs on the market and most flexible terms. This is partly because some Spanish mortgage brokers specialise in foreign buyers and this experience helps them to quantify the risks on behalf of the Spanish mortgage lender. This changes the attitude of the lender from 'I don't understand foreign clients so I won't lend much and I'll make it expensive just in case' to 'This mortgage broker has given me a very good idea of the creditworthiness of this client so I'm going to lend the client the amount needed and on good terms'.

A good Spanish mortgage broker also removes the language problem as they interface between borrower and lender and provide both sides with all the information then need in their respective languages.

© Mark Stucklin of Spanish Property Insight – Everything you need to know about Spanish property