Small guide on mortgages in Spain and how do they work

This article was updated on October 30, 2020

Some of my expat clients are interested in mortgages around the world, including holiday homes in Spain, Greece and beyond.

This article will discuss how to get mortgages in Spain. If you are looking to invest as an expat in a portable way,  contact me using  this form, or by using the WhatsApp function below.

Introduction

If you are purchasing land or house in Spain, you will have to think on the long-term, as Spain’s capital gains tax (CGT) of more than 20% can offset any benefits of buying for short-term investors, if your purpose is, indeed, short term investing.

Even if house prices rise, it is still likely that you’ll need a minimum of three to five years to offset all the costs related to propriety transactions involved.

The golden visa allows qualifying individuals to live in Spain and travel throughout the EU, without working or being granted to the state welfare. Golden visas require an investment of at least €500,000 (without financing).

Therefore, if you really want to have a house in Spain and you have all the set requirements, here is a little manual you should study thoroughly that should answer all your questions. 

What is a mortgage and what it’s its historical origin?

The mortgage is a real right and being a real right, it is invested through reimplementation.

It is born as a contract, before its registration in the Land Registry, from which it is born, and acquires the status of effective ‘’real right’’ against third parties. The characteristics in every situation are here summarized:

The term mortgage is a compound expression, which comes from the classical Greek language, derived from the words Hypo (below) and Teka (drawer, box).

The Hypo-Teka was for the Greeks something that was hidden, something which remained hidden under the drawer, since there were no external signs of its existence and since it did not entail the demand for possession in favour of the mortgagee to be constituted. 

The mortgaged property continued to belong and continued to be owned by the mortgagee.

Despite the current regulation and the idea of the mortgage we inherited from the Roman Law, there were two main ways of guaranteeing a debt, with effectiveness:

  • The fiducia consisted in the fact that the debtor had to transfer the credit of a property he owned to the creditor to guarantee the debt. This form of collateral generated a great lack of protection for the debtor.
  • The prenda or pignus, with a regulation very similar to the one we are currently using.

The subsequent refinements sometimes gave rise, when the debtor needed his assets in order to pay the debt, that the pledge was agreed without displacement of possession in favour of the creditor.

By using it in this way, the landowners guaranteed the payment to the tenant, ignoring their farm implements (which they were going to need in any case to work, so they could not yield to the creditor).

This figure was how the current mortgage was born. However, for reasons of legal certainty, given that due to lack of possession it remained as a hidden charge, it was not until the establishment of the Mortgage Accounting Offices, later converted into Property Registries, that they brought to the end of the mortgage as a hidden charge, through registry advertising, when it began to be used in a generalized way, as a great dynamizer of territorial credit.

Types of mortgages in Spain

The different types of mortgages on the market can be classified according to different criteria, among which are:

Based on the type of interest:

  • Fixed-rate mortgages. When the interest rate does not vary throughout the agreed mortgage term. The fees are constant throughout the lifespan of the loan. It is an interesting alternative if the agreed fixed rate is attractive enough to link us with the bank for the decades to come; As they have very high subrogation costs (compensation for interest rate risk that can be 4% or more), it is necessary to carefully analyze the conditions before signing.
  • Variable-rate mortgages. Monthly instalments are constant during each period, changing based on the mortgage reference rate when the interest is changed. In Spain, most loans are of this type, with a repayment system of constant or French and variable rate.
  • Mixed type mortgages. There may be mortgages that combine fixed rates with variable-rates. One percentage of the interest would vary based on a reference (usually the Euribor) and the other would be an agreed fixed interest.

You can also make a classification according to the type of fee:

  • The most common mortgages have a quota that remains constant during the interest rate revision period (following the French amortization system). The fee is recalculated each year or semester, usually based on the evolution of the benchmark plus the differential applied. The monthly payment is made up of an interest part and an amortization part, which reduces the outstanding capital; in the first years the interest part is very high and the amortization part reduced, changing this proportion as the years go by.
  • Cuota blindada (fixed instalments), which despite being at a variable rate, maintains the constant fee throughout the mortgage, varying the term. If the interest rate increases, instead of increasing the monthly payment, what increases is the term; the opposite occurs if interest falls.
  • Cuota final (final instalment), in which a percentage of the outstanding debt is paid in the last instalment (over 30%). The resulting fee is less compared to the French system, but we must bear in mind that we end up paying much more interest, since throughout the term of the loan interest is applied on the final unamortized fee, in addition to the fact that at the end of the mortgage must be saved that amount to fully pay off the debt.
  • Solo interés (interest only), widely used by certain foreign nationalities, in which throughout the lifespan of the mortgage no capital is amortized and only interest is paid (lack of capital). It would be a kind of rental but with the risks and advantages of being an owner (in relation to the increase or decrease in the price of housing). When the loan ends, the outstanding debt is the same as when it was contracted, with the client having to pay the total amount to the bank or sell before that moment occurs.
  • Cuota creciente (increasing quota), in which the quota grows a fixed percentage each year (usually 1 or 2%), apart from the normal variable rate variation of each revision. At the beginning, you pay less than with a constant fee, but after some period,  the fee grows year by year similarly to the French system.

Mortgages based on the client

Mortgages are classified according to the target client to which they are directed, such as:

  • Mortgages for youngsters. Financing under more advantageous conditions than those of the market in general, for clients under the age of 30 or 35. Depending on the competition in the market, this type of financing differentiated according to age may or may not exist.
  • Mortgages for non-residents (or residents abroad). Since the client does not reside in Spain, the concession criteria are stricter and it is usually required to contribute savings to cover expenses and 50% of the purchase price of the property. Residents can generally borrow up to 80% of the property’s assessed value whereas non-residents are limited to 60–70% LTV, depending on the mortgage type.
  • Mortgages reserved to certain groups: mortgage loans for officials, aviation personnel, employees of large companies, etc. 

Mortgages are different on the basis of the good we want to purchase, such as:

  • Bank owned-apartments mortgages, when the property being financed comes from the portfolio of properties adjudicated by a financial institution, normally by auction adjudication or pact of payment with clients who have not been able to pay their loan.
  • Mortgages for public or private VPOs (Viviendas de protección oficial or subsidized housing). Worth mentioning that they can not be sold at market price, but only at the stipulated legal value (after a few years you can try to disqualify them).
  • Mortgages on urban assets and on rustic assets (if the home is duly legalized).
  • Land mortgages. Usually to finance and build on developable land.
  • For the acquisition of a first home or habitual residence. The best mortgage deals focus on this type of guarantee since it is the least delinquent loan in the system.
  • To finance a second residence, when the client has already purchased a home for his/her family. We may be required to mortgage both homes if it is requested a high appraisal percentage.

Types of mortgage loans according to their nature

  • Promoter loan subrogation. When we assume the mortgage loan that the financial entity granted to the promoter who sells.
  • Subrogation of creditors or mortgages for bank change. It is the way to improve the conditions of a mortgage, by changing our financial entity.
  • Debt reunification, starting to pay a single mortgage payment that unifies the old loans and debts.
  • Reverse mortgage, in which the elderly owner who needs to complete his pension, mortgages his home free of charge in exchange for a monthly rent.
  • Foreign currency and multi-currency mortgages. They are a very risky product since we can owe more money over the years despite having paid many instalments if the currency exchanged against the euro is unfavourable to us. You only have to consider this type of financing if you are an expert in foreign currencies.

There is a wide variety of financing products for the purchase of a home and other purposes, which we must know in order to choose the one that best suits our needs and personal and economic characteristics.

Mortgage loans and credits

Contrary to what most people believe, a loan is not the same as a credit, although both concepts are debts that must be paid.

Whether it is a personal credit or a mortgage credit, the credits are debts that we contract and that must be repaid in monthly instalments or in another way (for example, credit policies can be returned completely for free, having an account into which income enters and payments are processed).

A loan is an obligation to repay money, through periodic instalments and interest. The Spanish financial institutions apply the French system of constant quotas, although there are other possibilities. Unlike credits, we are not granted a maximum amount that can then be used again, but a fixed amount that must be returned.

What are the expenses of a mortgage?

The expenses of a mortgage include concepts such as the payment of the appraisal, notary fees or other taxes, but not all have to be paid by the client, some vary based on the amount of the loan and others change depending on the region in Spain where the operation is performed.

If you are thinking about buying a house and need to ask for financing, it is important that you start calculating expenses carefully. When calculating what expenses the purchase of a home implies, there are two main items that you should take into account: 

  1. The costs of the purchase 
  2. The mortgage

Two concepts that can represent 10% of the value of the property that you want to acquire. That is, for a house that costs 200,000 euros, this figure is around 20,000 euros.

Regarding the first case (the purchase and sale costs), the costs you will have to face are limited to four large “invoices”, which are always borne by the buyer: notary taxes, registration costs and agency, and taxes (VAT (IVA in Spanish), if the house is new, or the Documented Legal Acts tax if it is second hand).

In the second case, we talk about five great costs: appraisal, notary, registry, agency and the Taxes of Documented Legal Acts. Now let’s talk about costs.

What are the costs of formalizing a mortgage?

A mortgage involves a series of expenses that you must take into account.

1. Valuation

What is it? The valuation is a procedure that allows the bank to know the value of a home and, based on that, calculate how much money it can lend you. In order to be offered a mortgage, it must be carried out, but the consumer can choose which company he wants to do it with.

How much does it cost? There is no legal limit to the cost of the valuation, although it usually ranges between 200 and 500 euros.

2. Notary

What is it? The notary is in charge of giving public faith to the deeds of the mortgage loan and who grants them.

How much does it cost? Its cost is established by the notary fees set by the Government 30 years ago and, at most, you can get a 10% discount depending on the professional you choose. To understand how much would be paid for a mortgage of 100,000 euros, the expected notary fees would be around 650 euros.

3. Registration

What is it? The registration of the mortgage deed in the property registry is a mandatory process, among other things, so that you are considered the only owner of the house that you are going to buy.

How much does it cost? The costs of registering a mortgage are also set by law and, for example, for a mortgage of 100,000 euros, the cost would be around 170 euros.

4. Management taxes

What is it? Management expenses are used to pay professionals for procedures such as tax settlement.

How much does it cost? The costs of mortgage management are not limited by law but are usually around 150-300 euros.

5. The mortgage tax

What is it? The signing of a mortgage implies the payment of a tribute: the Documented Legal Act Tax.

How much does it cost? Its amount is set by the regional administrations and, therefore, varies in each of the communities (or regions), although it moves in a range between 0.5% and 1.5% of the mortgage liability (that is, the sum of the capital provided by the bank, interest and other expenses).

Other mortgage expenses you should consider

In addition to the basic expenses involved in taking out a mortgage, there are other initial costs that you may have to pay when you sign your loan.

1. The opening commission.

When you hire a mortgage, the only commission that a bank can charge you is the opening commission, since the study fee (which was relatively common years ago) has disappeared with the new mortgage law.

This commission is not limited by law, but as of today, no bank charges you more than 1%. In fact, there are many entities, such as Openbank, COINC or Bankia, that do not apply anything to you for this.

2. Extra products

Today, the vast majority of financial entities discount the price of their mortgages if the client is willing to contract some extra products and services: that is, it offers a lower interest if they are willing to settle their payroll or take out insurance, cards or pension plans, among other options.

It is not compulsory to contract several insurances (or other products) with a mortgage, although in some cases it is very convenient to do so. For example, while having a home is mandatory (with some basic coverage), taking out life insurance from your mortgage can help you achieve better conditions, but it is not an essential requirement for you to be granted the loan.

In any case, you must take into account the cost of these policies –and any other extra- when calculating the costs of a mortgage.

How can you calculate the expenses of a mortgage in Spain?

To calculate the costs of a mortgage, you just need to start from a specific example (or the amount that you are going to request yourself) and start adding all the concepts that we have previously told you about. For example, if you want to know how much would be paid for a mortgage of 100,000 euros, these would be the estimated costs:

  • Valuation: 320 euros
  • Notary: 650 euros
  • Registration: 170 euros
  • Management fee: 250 euros
  • Documented Legal Acts Tax: 750 euros (in the Community of Madrid)
  • TOTAL: 2,140 euros

To calculate them in full, to this figure you would have to add more, in case your loan has the expenses for commissions and for related products.

Home purchase expenses simulator: what is it for?

As you will have seen in the previous example, calculating the expenses of a mortgage is not complicated.

However, to these costs you must add those related to the acquisition of your new home, which requires a greater effort. To help you, https://www.kelisto.es/simulador-de-hipotecas we put at your disposal a simulator of home purchase expenses with which you can know, in seconds, how much the final invoice amounts to that you will have to face if you want to become an owner in Spain.

This tool, which is useful as a mortgage simulator, is really easy to use. You just have to indicate how much the house you want to buy costs and, from that figure, the Kelisto simulator will do the calculations for you.

Once you have seen them, you will also be able to access their comparator of fixed mortgages and their comparator of variable mortgages, from where you will be able to know all the offers on the market, compare their characteristics and start the contracting process with the one that most interests you!

Who should pay the expenses of a mortgage?

Until a few months ago, it was not clear who should pay for the mortgage expenses. Except for the tax of Documented Legal Acts, which by law has to be paid by the consumer,  the distribution of the rest of the costs were not regulated by any regulations, so the banks would just leave the invoice to the consumer.

Are there banks that bear all the expenses of a mortgage?

Beyond the distribution of the expenses of a mortgage established by the new law, there are banks that have decided to go further and also bear the appraisal expenses, which should correspond to the client, as is the case with Openbank, ING or Pibank.

Of course, to take advantage of this, you must accept the appraisal that they provide you, instead of choosing the specialized company that you prefer.

Further Reading

Expats needs portability. The following article discusses the best investment for expats in this context.

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Adam Fayed financial consultant WhatsApp