The mortgage market in Spain 🇪🇸🏠
If you are a foreigner, want to buy a house in Spain, and are looking for financing, this is the blog for you. Stay to the end!
The real estate market in Spain
Spain has a very active real estate market. 13.7% of property purchases in Spain during the first quarter of 2022 have been made by foreigners. If you want to buy a house in Spain and you do not have sufficient funds, you may wonder how the mortgage market in Spain works and if banks or credit institutions grant financing to foreigners not residing in Spain.
Well, the answer is YES, but with nuances.
Let’s see how the mortgage market in Spain works.
First of all, you must be clear about what a mortgage is: Is it a loan or a credit? What guarantees the mortgage? What law regulates it?
In a previous blog post we explained what a mortgage is.
The difference between a loan and a credit is that in a loan the money is given from the beginning while in a credit an amount is granted in which the financial entity establishes the maximum limit and of which you can make use or not in its totality during a period of time.
It is usual that in the mortgage market in Spain you are granted a mortgage loan.
Obtaining a mortgage. What is the process?
Before contracting a mortgage, you can ask the financial entity for orientative information about the loans that they offer to their potential clients, through the Precontractual Information Sheet (FIPRE).
What do you have to analyze about the mortgage offer?
- The APR. This is the cost of the loan expressed as an annual percentage. It is used to compare different offers.
- Fees and discounts on the installment if certain products are contracted or certain requirements are met.
- The currency in which the loan is contracted.
- The products linked to the loan
- Total cost of the operation: interest, commissions, expenses, etc…
- The term
The entity will require certain financial information and will make a feasibility study to determine your payment capacity.
Within this feasibility study they will analyze your financial solvency, your income, your expenses, your debts, etc. Keep in mind that they will also consult in the files of unpaid debts in case you have any unpaid debts.
In addition, if you already have a reservation on the property that you want to buy, this entity will order an appraisal to appraise and evaluate the property. Also, you have to know that you can also provide an independent appraisal and the credit institution is obliged to accept it if the appraisal is carried out by an entity approved by the Bank of Spain.
In the mortgage market in Spain, the list of the approved appraisal companies can be consulted in the following link.
The appraisal of the property is important because the financial entity will grant you financing based on the lower of market value or the appraised value. Therefore, if the appraisal is lower than the market value, you may receive less financing than expected.
Once the appraisal is completed, the lender will inform you whether or not to grant you financing.
If the operation is viable, by virtue of the law 5/2019 of March 15, 2009, the entity must provide you with the following documentation:
- European Standardized Information Sheet (FEIN). It is a document that contains detailed information about the mortgage. It is a free document that serves as an offer and is binding for the financial institution.
- Standardized Warning Sheet (FiAE). This document informs about the minimum limits on interest rates, the distribution of costs, etc.
- A copy of the draft contract. This document is the draft of the mortgage deed that will be signed before a notary.
- Information on the distribution of expenses. The appraisal will be at your expense and the expenses of the notary, registry, and taxes (payment of AJD) are at the expense of the financial entity.
- The conditions of the damage insurance guarantees or the guarantee that the financial entity demands. Below we explain the documents and insurances that the financial entity can demand.
- The warning about the obligation that you have to receive advice from the notary.
All this information must be provided to you at least 10 days before the signing of the documentation.
Fixed or variable rate mortgage. Which is more favorable? 🤔
The interest rate is the price that banks charge for lending money. Choosing one or the other is what will determine the mortgage installment you are going to pay.
You should know that there are three different types:
- Fixed-rate mortgage. The monthly payment remains fixed for the life of the loan. You will pay the same installment during the whole mortgage.
- Variable interest mortgage. In this case, the interest rate varies according to the index reference. It is normally reviewed annually, although it can also be every six months.
- Mixed interest mortgage. Fixed interest is charged for an initial period and after this period, the interest becomes variable and will vary according to the index referenced.
Index and interest rates
When choosing between a fixed or variable interest rate, it is necessary to take into account the index referenced and the expectations of the rise or fall of this index.
In the mortgage market in Spain, a variable interest rate mortgage has the advantage that at the time of contracting the interest rate offered by the bank is lower than that of a fixed interest rate mortgage. The problem is if the interest rate rises.
In June 2022 the average rate of mortgage loans in the mortgage market in Spain for more than three years, for the purchase of housing, granted by credit institutions in Spain stood at 1.799% while at the beginning of the year, January 2022, it was around 1.48% and all forecasts seem to indicate that rates will continue to rise.
However, despite this rise, you’ll find interest rates in Spain still lower than in other parts of Europe. Another positive aspect is, for example, that in variable interest rate mortgages it is forbidden to set a downward limit on the interest rate.
Currency rate 💱
The aforementioned Law 5/2019 regulating real estate credit contracts, establishes that in the mortgage market in Spain the consumer has the right to convert the loan to the currency in which he receives his income.
Therefore, if you are Peruvian or Colombian and you have income in soles or Colombian pesos, you are entitled to ask for the loan to be in that currency.
This sounds great in theory, but the reality is that credit institutions hardly accept foreign currencies other than USD. To give you an idea, these are the currencies they normally accept:
EUR; GBP; USD; CAD; CHF; NOK; SEK; DKK.
In addition to these currencies, they also usually accept variable rate mortgages convertible to Euros in the following currencies:
BGN; CZK; HRK; HUF; PLN; RON
Insurance and products linked to the loan
Along with the mortgage offer you receive, in the mortgage market in Spain it is common for the financial entity to offer you insurance and other products linked to the loan, but is it obligatory to contract them in order to get the mortgage?
The answer is NO. Although it is not obligatory to contract them, the financial entities usually reduce the interest rate differential, so it can end up being a more beneficial option if you contract these products. For example, the financial entity can offer you a more favorable interest rate if you pay your salary directly into your bank account, if you sign up for credit cards or if you make regular deposits in your account.
This is known in practice in the Spanish mortgage market as “venta vinculada” (linked sale). In Spain, the linked sale of the loan contract with other products is prohibited, unless the bank demonstrates that the linked product generates a clear benefit for the client.
The most common insurances offered by credit institutions are fire insurance (multirisk home insurance), life insurance, and health insurance.
The only insurance that is compulsory when you take out a mortgage is fire insurance. However, it is not obligatory that you contract it with the same financial entity, although in practice it is the most frequent.
The financial entity will have to accept alternative policies, without any additional cost.
Costs associated with the mortgage
Within the information provided by the financial entity, there must be a section with the expenses related to the contracting of the mortgage. These expenses must be clear and concise. The most common are:
- Opening commission
- Early repayment
- Early maturity
- Notary’s office
- Notary Office
- Registry verification
Don’t hesitate to reach out if you have any questions!!