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Mortages in Spain

You are possible thinking of taking out a mortgage to finance the purchase of your new home and you may wonder if it is worth doing so in Spain.

In that case, remember that Spanish regulations on mortgage transparency and on consumer protection are among the most complete in Europe.

And what is more, the range of mortgage products available is very wide and varied.

Since the purpose of the loan is to make it easier to purchase a home, it has its own specific features:

The property acts as guarantee for the loan; Interest rates are lower; the amount involves is usually high and the term of the loan in longer than in other kinds of loans.

Mortgage financing is one of the most competitive, transparent and reliable activities currently existing on the Spanish financial market.

It is competitive because all credit institutions have a wide variety of products and all with the lowest interest known in the banking history.

It is reliable because of the intervention of a notary who certifies the operation and because such an operation is made public as it is recorded in the property register.

WHAT IS A MORTGAGE LOAN?

The mortgage loan granted by our / your lending institution is the loan that enables you to make the home you have in mind yours, its specific aim is to facilitate your purchase of a property its main characteristics is that as well as a personal guarantee, the property acts as a guarantee for the payment of the loan, However, this fact is what makes it possible for mortgage loans to have lower interest rates than other kinds of loans with a weaker guarantee. Furthermore, owing to the importance of the investment on a long term is allowed to make payment easier.

HOW TO CHOSE THE TIPE OF LOAN WHICH IS BEST FOR YOU?

Amount, in order to know the amount of the loan you can get two aspects have to be taken into account.

1. The value of the property. A recognized valuation company will tell you the value of the property and whether the amount requested by the buyer is the real market value. Such a valuation is another way to increase your protection as well as the protection of the lending institution which at your request can commission a company to carry out the valuation.

You must bear in mind that the valuation related expenses will be charged to you, whether the loan is eventually granted or not.

2.  Amount of the loan. As a general rule and in accordance with the detailed information you will be given further on, lenders usually recommend that the monthly installment you will have to pay for the mortgage loan should not exceed a certain percentage 35% of your monthly income. This is safer for you to avoid the risk of nonpayment if you have unexpected expenses.

Once you know the value of the property and based on your income the lender usually will lend to a maximum of 60%, 70% to 80% of this amount. Maybe even more if you provide additional guarantees.

REPAYMENT PERIOD

The repayment period is the time set in the loan contract for its total repayment. Because of the size of the transaction, mortgage loans may last a long time, from five years to fifteen, twenty even more. It is important for you to ask for an amount and a repayment period that best suits your possibilities, find the optimum point to extend the term more than necessary means paying interest for more years and to reduce it excessively could imply to heavy a burden.

INTEREST RATE

Obviously, the interest rate is a very important aspect of the loan since, along with the period, it determines what you are going to pay throughout the years, however you should not see interest rates as a isolated element, there are different type of interest rates, fixed or variable, and also to be taken in two account are commissions applied, and how much you are going to pay and how often, and the required re payment period.

COMMISIONS

The granting by the loan by the credit institution usually implies a commission known collectively as commitment charge, which covers the loan study and handling expenses it is usually a minimum percentage of the amount of the loan.

The early re payment commission is only applied if early repayment actually occurs, this commission refers to the extra payments the consumer decides to use to reduce the loan by reducing either installment to be paid monthly or the period.

Some times the commission varies if the loan is to be paid back in full repayment or only part of it, so called partial re payments. For lenders this commission acts as an insurance that covers the risk they assume owing to the fact that the transaction may be cancelled at the customers will.

In variable interest loans the commission for early repayment is limited to 1% normally.
In fixed interest loans the commission is usually higher due to the greater risk it implies.

APRC

APRC, stands for Annual Percentage Rate of Charge is the result of a mathematical formula including nominal interest rate, commissions and re payment period.
This is important because it lets you know watt is the effective cost or real cost of the loan (only applicable in fixed interest loans)

TYPES OF MORTGAGES

Nowadays, the range of mortgage loan products is very wide and varied. In spite of the many different trade names, four basic kinds of loans can be identified:

1.  Fixes interest rate loan

The rate remains constant throughout the loans life. In other words, whether interest rates increase or decrease, you the taker will always pay the same amount each month. That gives you some security because if interest rates rise, you will not have to pay more. On the other hand, there is an inconvenience in that if interest rates fall, you will not be able to take advantage. Another characteristic of this kind of loan is that its term is usually shorter and the commission for early re payment is higher. Remember this if you have decided to use part of your future savings to reduce the amount of the loan or the extension of the term.

2. Variable interest loan rate

This kind of loan does allow you to take advantage of falling rates, though obviously it also incorporates rises. Its main advantage is that there is no risk of the loan rate not reflecting the market rates from time to time normally every 12 months it is adjusted to match market rates.

The main characteristics are the interest rates change with the market, and a longer repayment period is allowed up to 25 or 30 years, also the commissions for early repayment does not go beyond 1%.

3. Mixed interest loan rate

This is the name used to refer to a loan period where the interest rate remains fixed for 2,3 or more years combined with another period where the interest rate is variable and changes according to market. The repayment period and the commission for early re payment are usually similar to those for variable loans. This type of loan combines the advantages and disadvantages of both fixed and variable loans although, by having two different periods the risk is partly reduced.

4. Fixes repayment loan instalment

This is a variable interest loan though it looks like a fixed interest one in that the consumer always pays the same installment irrespective of interest rate trends. The difference is that if the rates increase, instead of paying bigger installment, the repayment period is extended and if they decrease, it is shortened. Its main problem is uncertainty. The consumer does not know for shore when he will stop paying the loan, because the period depends on rate trends. On the other hand, he knows for certain that his repayment installment will not change in the least during the loans life.

WHAT ARE THE MOST COMMONLY USED INDEXES FOR LOANS?

Bank index: This is the average interest rate of mortgage loans lasting for more than 3 years granted by the banks during the month in question for the acquisition of a non subsidized house or property and is expressed in terms of Annual Percentage Rate of Charge (APRC). It is calculated by the bank of Spain from the information provided by the credit institutions.

A. Saving bank index

This is exactly the same as the previous one although in this case it refers to the average rates of mortgage loan contracts granted by the savings banks. It is also expressed in terms APRC

B. Average rate of credit institutions as a whole

This index includes both indexes above and consequently, the average considered is much wider.

C. CECA Index  

CECA stands for Confederación Española de Cajas de Ahorros. That is the Spanish confederation of savings banks.

D. EURIBOR, one year inter bank rate

Better known as EURIBOR, from the central European bank, this is the average price, or interest rate at which banks and savings banks lend one another money on the money market. It is not the rate of one specific day but that of the average of the transactions of the whole month weighted by the volume of transactions.

E. Public internal debt yeald

This index is not used very much. It is calculated from the average yield at which two to six year treasury bonds are negotiated.

Reference indexes are used to guarantee the consumer that his loan will be adjusted to market prices when the loan interest rate is reviewed because as we saw when we looked at the indicators, these are the average of loans concluded at a certain period.

However, when it comes to applying these indexes, we have two factors that need to be taken in two account, one is known as rounding up and the second is a spread of margin, in the first case the lending institutions tend to round up the decimals of references in order to make the computer calculation easier, in the second case this is no more than the added amounts by the lending institutions to the reference index used as a starting point.

F. Fixed installment

This is the most frequent, the amount of interest paid decreases proportionally according to the amount of capital repaid.

G. Increasing Installment

In this case the increase each year according to the pre set percentage. Its advantage is a lower payment at the beginning but naturally the burden increases as years go by. Its disadvantages is that you pay more and more interest.

Just the opposite, you pay back exactly the same amount of capital each time but with a progressively decreasing amount of interest. And so you pay less and less, the disadvantage is you pay more at the beginning.

WHAT DOCUMENTS SHALL I NEED FOR THE MORTGAGE COMPANY?

The documents you have to present to a lender can be divided into two groups:

  • Personal Information: Identity card / fiscal identification number, passport, if you are married, you will also be asked if there is a marriage settlement or similar, Don’t worry the lender is not interested in your private life, the reason is that in some cases the consent of both you and your spouse may be needed.
  • Economic information: It is usual for the credit company to request some type of document or certificate indicating your income or economic situation so that they can verify your ability to pay the loan installments, however if you are a regular customer of the credit institution that is going to grant you the loan, these procedures will be simplified.
  • If you are an employee: We shall need the last 3 wage slips, last income tax return and other proofs of income, were applicable.
  • Self-employed person: Last income tax return, Income tax payments during the current year and last V.A.T. return.

At this stage, Javea Homes / Property Auctions Spain, we have facilitated to the lender the copy of the title deed of the property to be purchased and the certificate or nota simple from the land registry.

At this moment a bank account with the lender has to be opened and a provision of funds deposited around 450€ depending on the property this money will be used to pay for the valuation related expenses will be charged to you, whether the loan is eventually granted or not.

MORTGAGE FOR RESIDENTS IN SPAIN

In general, the resident in Spain has access to a higher level of lending most  lenders are willing to lend up to 80% of the value of the property, in some cases and depending on the valuation of the property, 100% may be possible if it provides additional guarantees.

MORTGAGE FOR NON-RESIDENTS IN SPAIN

As a non-resident of Spain, you can usually borrow up to 70% maximum of the value of the property.

ONCE THE MORTGAGE IS APPROVED, WHAT INFORMATION WILL THE FINANCIAL INSTITUTION GIVE TO YOU

The financial institution will give you an information sheet with the basic features of the loan: period, interest rate, commissions, repayments installments and all the expenses you will be charged. This sheet concerning the mortgage lending will enable you to compare the different products. Once you have studied them and received the lenders initial approval you can ask for the formal binding offer. The lender will study your request and answer shortly after checking the situation with the building at the property land registry and after valuing it.

The binding offer is a document whose conditions will be valid for at least 10 days during which you can decide if you accept the offer or not. This document must specify in detail every element of the loan:

  • The value of the loan and how it is to be paid
  • Repayment, number of repayment installments, frequency, amount and date of the first and last installments, conditions in case of partial repayment.
  • Interest, nominal fixed or variable and in the case of the latter how, when and according to which reference rate it will charge and the margin to be applied.
  • Commissions, commitment charge and commission for early repayment – total or partial, the later will only be applicable if early re payment actually occurs.
  • Other expenses chargeable to the borrower: Property valuation, registration and notaries fees etc.

WHEN CAN I MAKE USE OF THE LOAN?

According to Spanish legislation, the mortgage loans comes in two force when the deed is signed to allow you to pay the seller there and then.

WHAT EXPENSES ARE INCURRED WHEN YOU SIGN A MORTGAGE?

  • Property valuation, this money will be used to pay for the valuation related expenses will be charged to you, whether the loan is eventually granted or not.
  • Registrar: Two concepts here, firstly when requesting information at the property registry about the house you are going to buy and secondly when recording, at the said Register, the deeds certifying that you are the new owner of the property and that you hold a mortgage loan
  • Notary: The notaries is the person who confirms the deed of sale and the mortgage deed as authentic and certifies the transaction. The Notary must inform and remind the customer of the financial clauses of the loan- commissions, APRC, reference index etc, and advise him if he finds any differences between the binding offer and the contract.
  • Gestoria: An administrative agency which will ultimately carry out the administrative procedures such as registration, tax payment, etc
  • Bank Charges: this item includes the loan commitment charge. Don’t forget that although the bank will inform you about the commission for early repayment, this in fact will only be paid if early repayment occurs

WHAT TAXES DO I HAVE TO PAID WHEN PURCHASING THE HOUSE WITH A MORTGAGE?

  • If you are buying a re-sale property or a property being auctioned of, you are obliged to pay Transfer Tax (ITP) at 10%.
  • If you are buying a new property or a property in the course of construction from a promoter, developer or builder, then you should pay VAT (IVA) at 10% plus Stamp Duty at 1.5%.
  • The VAT (IVA) rate increases to 21% if you are purchasing plots of land, commercial premises or garage spaces.
  • Stamp duty tax, it amounts to between 1% of the mortgage guarantee value that means between 1.5 to 2 % of the amount of the loan.
  • Opening fee from the bank between 0.5% and 1%
  • Compulsory insurance
  • If you are purchasing a property at an auction we recommend that the financing is pre-approved by the lender prior to participating at the auction as some lenders are not familiar with the procedure or directly will not lend, we work with various banks that in principal are in agreement to lend.

If we ad all of them up as a rule of thumb more or less it is a 12% of the purchase price.

But don’t forget to insure your future!

Insuring yourself against unexpected problems in the house is as important as the selection of a good loan, or even more, legally, you are only obligated to take out a material damage insurance covering the value of the property.

However, the house is too important a property to leave anything to chance, consequently, besides insuring the contents or the building structure, you should think about covering other possible events.

Your lender will inform you about the insurance you might take out we summaries them briefly as follows:

  • Fully comprehensive insurance
  • Life insurance or mortgage insurance

We hope you have found the above information, interesting, useful and help you have a better insight to the mortgage possibility.

Disclaimer: Due to constant changes in current legislation the information in this document could be out dated, we recommend to search other information sources an

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