At Rose Financial Services, being recognised as a specialist mortgage brokerage and independent financial adviser, we receive enquiries from people from all walks of life. And it is no surprise then that the volume of enquiries sees a repetition of requirements.
The following guide has been produced to answer many of the standard questions that clients ask of Rose FS on a day to basis with regard to raising a mortgage secured on a property in Spain. It is in 3 parts, so make sure you collect them all to provide a broad based understanding of how mortgages work in Spain.
1) Are 'Interest Only' mortgages available?
Yes, and the term for the 'Interest Only' (IO) period ranges from 1 year to a full term of 25 years. However, the schemes offering longer term IO (10 to 25 years) are far more restrictive than those for shorter terms (1 to 5 years) as the Spanish lending market has yet to adjust to the British way of thinking in this respect.
After the initial IO period the mortgage automatically switches to a Repayment or Capital and Interest type for the remainder of the mortgage term. For example, if a mortgage is arranged over say, 20 years with an IO period of 2 years, from Year 3 the mortgage will switch to a Reapyment over the remainder of 18 years. The rate of interest will still be the same i.e. annually fixed, but you will be asked to start repaying the capital as well as the interest.
At this stage, we have various choices open to us and it is a good idea for you to review matters with Rose FS;
i) Allow the mortgage to transfer to a Repayment type and start to repay the capital. However, this is not always good IHT planning (see Question 2) below).
ii) Ask the bank to extend the IO period. There is no guarantee that they will allow this but market conditions then may make them find in your favour.
iii) Consider a remortgage and switch to another lender. The downside to this, of course, will be the costs attached in doing so. It is therefore important to consider your long term requirements when planning the detail of your mortgage
2) Why would I want an 'Interest Only' mortgage as opposed to a Repayment (Capital and Interest) mortgage?
The mental approach to this is different than the normal rationale applied to borrowing in the UK. The benefits are often very different;
I) In Spain there is a 'sleeping giant' of an issue which most home owners are simply unaware of: Inheritance Tax (IHT). Go to Question 12) for a guide to this VERY IMPORTANT issue.
It is so important that any property acquisition in Spain cannot adequately be considered unless this subject is understood.
Ii) Interest rates for mortgages in Spain are low by comparison to the UK and, in most cases, the capital and income employed to either meet interest payments or repayments emanates from a £ income or capital base.
That being so, there is a benefit to retain as much capital as possible in £ and invest it for a higher return. For example, even cautious investment into a deposit account can generate an interest rate return of 5% as at the date of writing. With an average Euro mortgage rate of say, 3.5% the net return is at least 1.5% per annum. Over a standard term of 25 years, that will gross up to 37.5% of capital employed. If the mortgage is for EUR150,000 by way of example, that equates to a massive extra income of EUR56250 or approximately £40,000.
Iii) Interest paid is normally allowable against income received for the purpose of calculating Income Tax. Therefore, the longer an IO period is run, the greater the interest paid and hence, the tax saving. Remember, that there is also an added income via the reduction of capital employed as mentioned above.
Iv) There is a potential exchange rate risk in holding an asset (your Spanish property) in a foreign currency (Euros) against the natural income and capital base (normally £ for the majority of our clients).
Therefore, by keeping the liability (your Euro mortgage) as high as possible for as long as possible, there is an offset which can mitigate against negative exchange rate movements.
3) What is the normal interest rate payable for a Spanish Euro mortgage?
Rates are normally set against the European Central Bank annual rate (Euribor) or the Spanish Cajas rate with a margin and re-fixed annually. This helps cash flow projections. It is often common to see a discount offered for the first year.
Hence, the current first year rate will range from sub 3% for low IO terms and Repayment mortgages. For longer IO periods a premium is charged by the lenders, so that the average rate will be circa 3.3% to 3.6%.
4) What documents do I need to show?
ID. Passport and either a
Residencia Card (for Residents) or an
NIE (ID number for Non Residents). Rose FS will assist in arranging any NIE needed.
Proof of Income Pay slips x 3 months
Rental income contracts
Tax Assessment (Self Employed)
Trading Accounts (Self Employed)
Accountant's Statement of Affairs (Self Employed)
Bank Statements x 3 months (for all bank accounts, UK and Spain)
Existing mortgages x 3 months statements
Remortgages Existing Escritura
Original Compraventa (Purchase contract)
Quotations for any works being financed or property being purchased
Latest existing mortgage or loan statements being consolidated
Purchases Compraventa (Purchase contract)
Solicitor contact details
Estate Agent details
That all sounds a lot but, in most cases, many of the documents will not apply.
Also, Rose FS need only COPY documents and not the originals. However, the original passport, NIE or Residencia will be needed at the legal completion of the process.
The application process can be actioned from a distance via post, fax and e mail. You do not physically need to meet a mortgage adviser and we will complete the process of determining your needs by phone.
5) What are the costs of arranging a mortgage?
Arranging a mortgage in Spain is slightly more expensive than in the UK and broadly you should allow 5% of the mortgage amount needed as follows;
1% Lender fee
1% Rose FS fee (minimum EUR1,000)
1.6% AJD Mortgage tax
0.15% Valuation fee Up Front
EUR300 Booking fee Up Front
As you can see the only monies needed by Rose FS to apply for the mortgage are the Valuation and Booking fees. All other costs are due at completion and will be deducted from the mortgages advance over the new current account with the lender.
6) What is the cost of repaying the mortgage early?
Redemption penalties, as they are formally called, are relatively inexpensive in Spain. The norm is for 0.5% for partial repayment and 1% full repayment. However, a common ploy in repaying a mortgage is never to redeem it in full but to leave a small balance outstanding.
7) Do I need to use a specialist Spanish and English speaking solicitor?
For Remortgages, where you are switching lenders, or simply releasing capital/equity from your home or debt consolidating, no! The process is relatively simple and does not warrant the extra cost of using a solicitor.
However, for a Purchase, using such a professional is STRONGLY recommended. Rose FS will happily recommend a firm.
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