Villa2Spain - 2011 News and buying tips

These are certainly interesting times for Spain, in both the property and mortgage markets, as well as the economy in general. You may have read recently that the average price of property in Spain is now down to 2005 levels, 22% lower than when they peaked at the end of 2007. However, this is a national average and prices have fallen far more in some cases up to around 50% – in certain areas. Of course, there will also be certain geographical areas where prices fall less and there have even been price increases in some specific locations, albeit very small ones. The mortgage market has also seen some interesting developments since our last newsletter, which we cover below. On top of this, we have a new government, with the Partido Popular (PP) back in power after 7 years in opposition. Certainly, the new government has its work cut out to avoid a debt default, but the change in government is generally being seen as positive.

Mortgage Interest Rates

Since our last newsletter, the majority of lenders have increased their interest rate margins, as well as making other changes to their terms and conditions. One bank has increased its margin three times in recent weeks and over the last 12 months its margin has doubled to its current rate of 2.2% above annual Euribor. The reason, according to the bank, is that unless they increase the rate margin, the amount they can make on mortgages does not justify the risk of lending. Banks themselves are currently paying 4-5% interest to borrow money on the money markets.

Several banks we work with are no longer lending in certain areas and another bank has stopped lending altogether. The stronger banks are still lending though which is encouraging news.

In early November, the European Central Bank (ECB) reduced the main rate by 25 basis points from 1,5% to 1,25%. This reduction is clearly not being passed on to mortgage applicants by the banks, as they have raised their mortgage interest rates.

Despite the recent upheaval, we still have many clients coming to us for mortgages. Many of these clients see an opportunity to buy properties at very low prices. The future of the euro and whether it will still be Spain's currency in years to come is obviously a consideration, but we have clients buying properties across the whole price range, so clearly currency worries are not deterring them from going ahead with their purchases.

We are sometimes asked the following question by estate agents we talk to for the first time: "Why should we use an independent broker if we can take our clients directly to local banks, they do not have to pay your fees and the bank pay us a commission?"

It is a good question. We thought it would be useful to summarise the response we have given to these agents, as the same points are relevant for all estate agents/introducers:-

- the first and most important point is that a large percentage of clients see the value in the service that a good independent mortgage broker offers and are happy to pay a reasonable fee for this service

- what a client pays in broker fees is usually recouped quickly, in some cases within a few months, by having lower mortgage repayments and set-up fees (bank opening fees, cheque costs, insurances etc)

- it makes financial sense for clients to get the best deal available (highest loan-to-purchase price, lowest interest rate etc.) by using a broker that is constantly monitoring the market and well informed on the terms and conditions that all the banks offer

- not all clients have the time or want to do the work involved in finding the best products, but want to have access to all available products

- working with the banks continuously, a broker will normally be dealing with the right people to get mortgages approved quickly and efficiently and the broker will understand each bank's internal processes very well

- not all banks use the same debt-to-income (DI) ratios, so while one bank offering 70% loan-to-purchase price may use 30%, another may use 40%, which in some cases can be the difference between a success or failure

- the last point is also one of the most important - there is no obligation for clients to pay us a fee until they wish to proceed and we provide them with an initial quote before we ask for any payment. With Mortgage Direct, our Money Back Guarantee protects the client so they have nothing to lose and everything to gain! They get their fee back if the mortgage is declined prior to the valuation.

The above are just some of the reasons why it is always beneficial to get speak to a good independent broker when arranging a mortgage for a Spanish property purchase.

You will need a Spanish bank account (to enable you to pay for amenities supplied to your property - eg., electricity, telephone, water etc.)

You will also need a lawyer, obviously a lawyer that speaks your language and is experienced in Spanish law. Villa2Spain introduce you to English speaking lawyers if you wish.

If you need a mortgage we can also advise you on this. You will need to decide on a mortgage with a British company or one held in Spain. As with many things, there are pros and cons for each: Villa2Spain can advise you on all aspects of choosing a mortgage.

Under Spanish law the definition of a Spanish resident is someone who spends more than six consecutive months in Spain in any calendar year. This renders you eligible to pay Spanish taxes. These include a yearly charge levied by the local Town Hall - an annual Real Estate tax (IBI). If your property is a resale, the previous owner is obliged to provide you with bills which detail this.

If you buy in a complex or large development Community Charges will be payable - these are to cover general maintenance, gardens, communal areas, and swimming pools etc.

When you purchase property in Spain the price will be in Euros - therefore, you will have to buy the currency to pay for it. In recent months, Sterling has fluctuated by as much as 10% - this can have serious repercussions for your property purchase: if the pound strengthens your property will cost you less, if the Euro strengthens it will cost you more. If you are not prepared to gamble on the fluctuating exchange rate it is possible to ‘fix’ the exchange rate for your purchase. This can work in two ways. If you have the funds available in full you can purchase all your currency via a 'Spot Contract' - you then hold the funds in a deposit account and make payment as and when needed. If you do not yet have all the funds available then you can purchase as much currency as you can afford at present and reserve an exchange rate for the remaining payments (you must pay 10% of the value immediately, and the balance in full by the date you have reserved your currency until). This is called a ‘Forward Currency Contract’ (in effect: Buy Now, Pay Later). The exchange rate for this is not as good as a Spot Contract but it does have the advantage of enabling you to know your costs beforehand.

View the property at least twice, preferably at different times of the day. If possible talk to your potential neighbours.

Your lawyer will ensure there are no outstanding debts on the property. In Spain, debts remain outstanding on the property: make sure you don't inherit someone else's debts