Getting a mortgage in Spain

Sun, sea and sangria make Spain a popular holiday destination - and also a hot choice for those looking to study, work or retire abroad. Because rental options can be limited in Spain, buying a property makes sense for those staying longer term, or looking for a holiday retreat.

But you’re smart (and presumably, you have not been under a rock for the past few years), so you’ll already know that Spain’s property market was hit hard by the global economic crisis. And that means both opportunities and risks for those looking to buy a home in Spain. Understand the local market to make sure you don’t become a target for unscrupulous fraudsters - and get to grips with the regulations to ensure you don’t fall foul of the law.

If buying a property in Spain is on the cards for you, then getting a mortgage will be a priority. Here’s a beginners guide.

Can I get a mortgage in Spain as a non resident?

Spain encourages foreign investment in property - which means that non residents can get a mortgage for a home in Spain - but the products on offer may have more restrictions than those available for residents. It is good to know in advance your likely residential status before you choose a mortgage product, to make sure you get access to the best range of options.

Generally mortgages on second homes are considered more risky (and therefore offered at higher rates) than homes that will be a main residence. That’s because it’s assumed that customers in financial trouble will default on a holiday property before their main home. If you are looking to purchase a second home, you are likely to need a 30-40% deposit to secure a mortgage.

It's slightly better news for people intending to reside in Spain, who should only need a deposit of about 20%. Whether you’re in the market for a first or second home, you will also need to pay fees and taxes, which can amount to a further 12-15%.

How are mortgages in Spain structured?

The criteria that mortgage providers use to assess your creditworthiness will vary between institutions. However, most banks will check the combined costs of your lifestyle and any existing loan repayments you have, in order to make sure that any new debt is still affordable. To do this they typically operate an affordability ratio based on your net income after tax, and look to ensure that your debt repayments do not exceed 30-35% of your net earnings. Expect to complete a personal balance sheet to show your existing financial arrangements, and to provide documents to prove your income and outgoings.

According to Estate Agent, Rightmove, average interest rates offered in Spain come in at 4.16%. Most mortgages in Spain are arranged on a tracker basis, following the European Central Bank lending rates, Euribor. Banks offer mortgages at a margin above the Euribor rate, such as Euribor +1%.

Although fixed rate mortgages are available in Spain, they are not a popular choice with local borrowers, as central interest rates have traditionally been fairly low in the Euro area. As with any financial decision, it is important to consider your mortgage options carefully and ensure that your monthly payments would still be affordable if interest rates were to rise in future. Additionally, if you are taking a Euro mortgage, but your income source is in sterling, then fluctuations in exchange rates will impact the monthly costs of your loan.

If you are arranging a mortgage in Spain, be prepared for the costs incurred to look different to a UK property transaction. You can expect to pay mortgage deed duty which is 1.8% of the loan, and bank fees which are typically set around 1% to 1.5% of the mortgage amount. All documents related to the purchase will have to be signed at the notary office, increasing the costs by a maximum of 0.5% of the loan value.

Finally you will pay a valuation fee, a broker fee if you choose to arrange your loan through a broker, and 10% VAT if you buy a new build property. If you are not buying new build, then sales tax of 5-10% of the value (depending on the location and type of house) is payable upon completion. There may also be local charges to consider, so take professional advice once you have identified your new dream home.

Should I use a broker or go direct?

You can arrange a mortgage in Spain direct with your chosen bank, or through a broker. Be wary of fraudsters who claim to be brokers - especially if they ask for upfront fees. Take recommendations from friends or family when choosing a mortgage agent, or ask to be put in touch with previous customers for a reference.

Brokers are useful because many Spanish banks do not offer set mortgage terms, but rather work on a negotiated basis with each individual client. This means that having someone on your side who speaks Spanish, and really understands the system, can pay dividends. Mortgage agents such as IMS or SPF offer a free initial consultation to help you understand their services if you are undecided.

Arranging a mortgage through a broker will cost somewhere between 0.5% and 1% of the overall property price. It is not the right choice for everyone. If you can confidently communicate in Spanish (including understanding legal documents), and have the time to research your options, then you can arrange a mortgage direct - but if you’re unsure, using a reputable broker can help you avoid problems and make sure you get the best product for you. Naturally, mortgages in Spain are legally binding - so any mistakes or misunderstandings can be costly.

If you want to get a feel for the range of Spanish mortgage products out there, IMS offer an anonymised mortgage rate overview, or you can browse one of these major banks’ sites.

Abanca

With an office in London, Abanca can be a convenient option if you wish to arrange a mortgage before moving to Spain. They offer a range of different mortgages depending on the circumstances. Contact their London representative directly to check eligibility criteria and mortgage products that might be available to you.

Bankinter

Since the economic crisis, some Spanish banks have stopped offering mortgages, or significantly narrowed their product focus. Bankinter, however, continue to offer a range of different mortgages, with a reputation for reasonable (mid market) rates and terms. As with most Spanish mortgage providers, all application details are in Spanish, so you may need to seek help when applying.

Santander

Santander is a name familiar to Brits, since their takeover of UK bank Abbey. As one of the largest providers of mortgages in Spain, Santander have a predictably wide range of mortgage products on offer, including fixed rate, tracker, and combination deals. Check your eligibility on the site, and use the handy mortgage calculator to estimate the amount you may be able to borrow.

Although arranging a mortgage in Spain will be a slightly different experience to borrowing for a property purchase in the UK, it is a path well trodden by generations of sun seekers.

You could be just a few steps away from kicking back in an unspoiled Andalusian mountain-top villa, or being serenaded by Spanish guitar in Seville, the romantic birthplace of tapas. Get exploring your options now - you can thank us with a glass of sangria later.