News: The myth of the 100% Spanish mortgage

News, the myth of the 100% mortgage in Spain
Written by Inmo Investments - 22 Jun 2016

In common with the rest of Europe, it used to be an everyday practice to arrange a mortgage that would cover the entire cost of buying a property in Spain. The 2007 global financial crisis changed the rules, and 100% mortgages are now very rarely an option for the Spanish home buyer.

In 2015 some banks and niche financial institutions began to advertise 100% mortgages again. Little more than a strategic marketing tactic to attract Spanish property buyers, these mortgage products are exceptionally hard to obtain and come with a sting in the tail.

The new wave of 100% Spanish mortgages work very differently from their pre-crisis ancestors, yet one aspect remains very much the same: they let you buy a home in Spain without saving for a deposit.

However, the lender will almost certainly require collateral security. This usually comes in the form of a legal charge registered over another property - perhaps a property that you own at home, and that has serious implications. It means that the lender can pursue the buyer for any shortfall if they have their home in Spain repossessed and sold, and force the sale of the registered property too.

Spanish banks are keen to avoid the pitfalls of repossession, something they have rather unfortunately grown used to dealing with since 2007. They know all too well the true costs of repossessing a property in Spain, the costs of reselling them, assuming liability for unpaid taxes and other expenses, in addition to the initial capital loss they suffer due to historic negative equity.

Lenders are under pressure from the Bank of Spain to lend credit responsibly, and to avoid high-risk residential investments. Only 100% mortgage applications from potential clients with a pristine credit history are considered, but additionally, only when the applicant has a stable income and many years of service with a reknowned company or corporation.

Just like pre-2008 100% mortgages, the new breed of 100% Spanish mortgages carry some serious risks, but these days that risk is assumed by the buyer rather than the lender. Fees and charges may not be as competitive as mainstream mortgages and you will have fewer deals to choose from in Spain.

Although lenders may have found a new way to offer 100% Spanish mortgages by asking borrowers to contribute additional security, nothing much has changed in that they put buyers at risk of negative equity. Although the property market in Spain is a very different beast today, having turned a corner in 2015, with a 100% mortgage a buyer is at greater risk of negative equity than a buyer who has contributed financially to the cost of their Spanish property.

In addition, buyers should be prepared to pay extra for a Mortgage Indemnity Guarantee. This is an insurance policy to protect the lender against loss if the buyer defaults. The lender will almost certainly insist on one being in place but it´s the borrower that pays for it.

Of course, the truth of the matter is that 100% Spanish mortgages never were 100% mortgages in the first place. Spanish taxation legislation requires that buyers pay tax in addition to the agreed purchase price of their new home, usually around 10% to 13% of the value of the property. So even an arranged mortgage for €100.000 to completely cover the cost of a Spanish property purchase would require the buyer to contribute up to €13.000 in personal savings to cover the expenses of acquiring the home.

These days it is more commonplace for Spanish banks to offer up to 80% mortgages toward a property purchase, with the buyer providing the balance: 20% toward the cost of purchasing the property, plus an additional 10% or so to complete the sale.

Perhaps with the heavy risks associated with 100% Spanish mortgages, a more conventional financial product might provide more long term stability and peace-of-mind. Especially considering that the chances of qualifying for something that is so rarely offered is exceptionally unlikely.

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