The interest rate rises of the past couple of years have been a shock to the system after the low rates which were the norm for so long. In 2016, interest rates in Europe were in negative territory, which was completely unchartered. But when a longer cycle of 25 years is considered, if you exclude the years between 2009 and 2021 (following the financial crash and then Covid) the average rate for the Euro Interbank Offered Rate or Euribor is just under 4%, which is pretty much where we are now. The index I refer to is the 12-month Euribor, which is what the vast majority of Spanish lenders use for any form of variable interest rate and their margin is added to this index rather than the rate set by the European Central Bank.
Spanish banks eager to target the UK market
Spanish banks proved resilient, taking Brexit and its fallout in their stride, and importantly have demonstrated an eagerness to target the UK market. Spanish high-street banks can be generous with loan-to-values (LTVs) for non-residents, prepared to lend up to 70%, and for those buyers who will use the property as the principal residence, 80% may be achievable. Products are on a repayment basis and there are short and long-term fixed rates. Competition between banks keeps pricing attractive, low fixed rates are currently available from one year to the whole term of the mortgage. The expectation is that in this and next year, rates will be falling so on shorter-term fixed products by the time a mortgage is up for renewal variable rates should be far more attractive as the Euribor which these loans track will have fallen.
The mortgage market in the UK is incredibly flexible and property is an asset that can virtually always be used to secure finance. This is not the case elsewhere in the world and buyers should be aware that taking a mortgage when buying the property may be the only chance to do so. Capital raising, i.e. looking to release funds a few years after purchase, is exceptionally difficult to find in Spain.
Offsetting the Wealth Tax with a mortgage
For clients with deeper pockets, there is the added incentive of a mortgage offsetting the Wealth Tax or Millionaires’ Tax as it is often referred to in the local Spanish press. This is annual tax payable when the total value of the real estate asset is greater than €3m and there is a sliding scale of tax ranging from 1.7 to 3.5%. A mortgage on the property can reduce the net value of the asset to below this threshold and therefore the tax liability.
Securing a mortgage from a private bank
For loans over €3m, many owners opt for a mortgage from a private bank. These lenders have the expertise to understand more complex income and have far greater flexibility on age but generally the maximum LTV would be lower at 50%. However, the vast majority of banks do not wish to lend on property that is a main residence and require a borrower to set up a special purpose vehicle rather than buying in personal names so there are some additional set-up costs. The mortgage would usually be on an interest-only basis on a five-year renewable facility, either fixed or variable, with the loan repayable at maturity. High-net-worth individuals often find they do not fit the affordability criteria of Spanish retail banks so are more naturally private banking clients, but European lending always requires a wider relationship with the bank so only taking out a mortgage is not an option. The standard requirement is always for a minimum of €1m to be invested with the bank to qualify for a loan and the total investment should represent 50% of the loan amount.
Competitive interest rates
Spanish lenders have worked hard to provide competitive interest rates and all expect interest rates to fall this year, which should make borrowing terms even more attractive. Interest rates are in the 3 to 4% range, while it is possible to further reduce the rate and future margin over 12-month Euribor if additional services are taken such as life insurance or alarm packages, which can be particularly useful for non-residents.
It is always worth considering a local mortgage as rates compare favourably with the UK and in addition there may be potential tax benefits. Ideally speak to a specialist broker well in advance, before you find a property, to ensure you have the complete picture and plenty of time to secure competitive finance in a narrow window.
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