Financing a property purchase in Spain
Advice from TRG
Spain - Housing & Rentals
For many it’s an eagerly awaited time when a family’s dreams of owning a place in the sun are finally realised. We have heard many romantic tales of clients; “Just looking” by attending a property show in the UK. Turning a misty afternoon at Aintree Racecourse or a balmy summer’s evening at Sandown Park into the start of a love affair with a beautifully presented property overlooking the crystal Mediterranean.
Taking an attractively priced inspection trip to their chosen destination and consummating their new found passion by placing a deposit to buy their property “off plan”. Trust me, for many, the experience was and is a pure pleasure. With generations of the buyer’s family and friends flocking to soak up some sun on the newly completed terracotta tiled terrace. However, for other purchasers, two to three years on from paying their initial deposit, the reality of a property being ready for “Completion” hits.
For the vast majority who have paid a deposit plus, often, several stage payments to arrive at the point when the property is ready for its occupants, their decisions are relatively straight forward, depending upon their individual circumstances:
Do we raise a mortgage for completion locally in Spain?
Spanish operations, including the local office of UK lenders, continue to offer very competitively priced mortgages – around 3.75% to 4% are usual. Rates are scaled to the current Euribor (Euro Interbank Offered Rate) rate – plus an agreed additional percentage. An offer may well be accompanied by a one or two year interest only arrangement. Loans to value of up to 80% and terms of between 10 and 25 years are available.
However, you should note that the costs of raising mortgage funds are front end loaded and are quite significant - See below. Additionally, should you wish to redeem your mortgage early, there is usually a redemption penalty charged by the bank of 1%? However, it should be noted, that many lenders allow an annual partial redemption at no added cost. Most mortgage brokers seem to recommend that as the redemption penalty is in respect of a complete redemption, if you are in the fortunate position whereby you are able to redeem early to avoid costs, you may chose to pay off 99% of your mortgage loan.
This is a sound startegy if your circumstances are faily “regular”, you are able to provide valid P60’s, pay slips and bank statements justifying income.
It is argued that as the inheritance tax (IHT) laws of, particularly, Andalucia are somewhat restrictive and because of the lack of inter spouse transfer on death, may be pernicious as between a husband and wife, that having a mortgage is fairly useful IHT planning. There may be some merit in this approach. In other parts of Spain IHT has been done away with in favour of Succession Taxes which tax the recipient of the asset not the Estate of the giver.
Do we take the developer’s mortgage offer?
As the developer will have borrowed to finance the construction, he already has a lender who will be keen to pass onto the incoming purchaser a share of the total borrowing that is represented by the individual property. Be cautious. Often the rates offered by a developer’s financier are well in excess of the market rate. Conversely, many Private Purchase Contracts (PPC) contain a provision stipulating that if at the completing the purchaser doesn’t take the developers finance then a penalty, usually 1% of the funding which has not been taken, will be requested from the purchaser.
Do we raise an equity release arrangement on our property in the UK?
I suspect that this may not be a preferred option as, currently, the costs of servicing such UK borrowings may be significantly higher than an equivalent loan in Spain. Additionally, although some excellent currency broking businesses – see below - exist there may be an exchange rate risk if it is intended to obtain an income from the rental of the property in Spain in € to service UK borrowings in £.
It may be interesting to note that only relatively recently have equity release arrangements been available in Spain respect of a Spanish property. Currently, these products are more used in relation to pre-owed and unencumbered property but as the financial market in Spain evolves we expect to see more borrowings against properties that have previously been mortgaged.
Do we place our own UK capital into the property to complete?
This is a means of reducing the outlay on mortgage funding and wholly depends on personal circumstances. Many clients have chosen this route if they have the funds available as they are either not interested in obtaining local rental income or they are not convinced that they will make sufficient rental income to service their local mortgage borrowings.
How do we make an economic transfer of funds to Spain avoiding exchange rate vagaries or the heavy transfer costs of High Street banking?
Specialist currency brokers handle many thousands of € Euro/ £ Sterling and vice versa deals everyday. The size and buying powers of their business – and because they specialise in this currency exchange function – means that they really do offer the most competitive service.
For someone who needs to ship €s from, say the UK, or a non-€ country, to Spain for a completion this is the most prudent method. Whilst many of our clients have saved sizeable sums on making a bulk transfer others continue to save on a monthly basis, as they pay their mortgages in €, and need to transfer agreed amounts from their £ Sterling bank accounts.
UK high street bank’s exchange facilities are rudimentary and their costs are high. We are told that often a “tourist” rate is applied to their conversions. Additionally, we have many examples of funds being “lost” in the UK banking system for up to three weeks whilst they are transferred through the European banking system. The only gain to be had is enjoyed by the bank.
What are the costs of raising a Mortgage in Spain?
If you are planning to complete your purchase using mortgage funding, in addition to the costs of servicing the borrowing you’ll need to budget for the following additional costs:
- Bank Valuation Fee - Calculated as a percentage of the valuation for smaller properties usually in the region of €400 to €750 plus local VAT or “IVA”. Rising to 1% of the valuation for larger properties.
- Bank Arrangement Fee – Often 1% of the mortgage loan amount.
- Stamp Duty – Based on mortgage liability and usually around 1.8% of the loan.
- Notary Public Fees – The mortgage needs to be signed and witnessed in front of a Notary in order to be effective. Notary’s fees for this role are calculated as a percentage of the mortgage liability.
- Property Registration fees - Land Registry – The mortgage needs to be recorded as a charge against the property and fees will be due based on a percentage of the mortgage liability.
- Legal fees – which may be between .75% and 1.5% of the mortgage loan amount. These fees may sometimes be substantially reduced or waived where the lawyer is handling the completion of the off plan purchase.
For those who went large and optioned two, three or more off plan properties hoping to be able to pass on or “flip” the contract before completion, pocketing a handsome profit in the process, a level of high anxiety is a usual symptom. They face a decision of which course to follow. The choices are usually straightforward:
a) Raise mortgage or other funds to make the completion;
It should be noticed that lenders in Spain have not yet become culturally used to the “buy to let” investor market. They often have a difficulty in lending to a purchaser who is buying more than two properties.
If you do arrange funding to complete on all the properties optioned, being the owner of a multiple properties will bring its fair share of benefits and some headaches.
Of course, this also applies to the purchaser of a single property, but you’ll need to organise the “commercialisation” of your properties. This will include the fitting out of the properties for the long and short term rental market - whichever you see as being the most stable and delivering sufficient income to service your borrowings.
Several excellent furniture packages exist which should costs between €8,000 to €12,000 to simply furnish a straight forward two to three-bedroom apartment to appeal to the rental market.
You’ll need great rental management to ensure that the number of “void” weeks are minimised and this is usually available for around 15% of rentals for short term and one month for long term. The month – on a long-term contract - often being paid by the tenant.
Please note that as a landlord in Spain you will see an income here and broadly you should expect to pay around 25% in tax on this income, unless declared elsewhere and a tax credit in Spain applied for. A useful information is www.agenciatributaria.es
b) To sell at a lesser market value;
The holder of a PPC option may seek to sell at a price that is less than the price that they agreed to buy at. Any theoretical profit, which may have been generated over the last couple of years, is passed on to the incoming purchaser. The motive behind the sale in this way being merely to recover as large a percentage of the deposit(s) paid as possible. We have assisted clients to make such sales but they are unattractive but possibly expedient.
c) Cut your losses.
Given the cash exposure of the deposits and instalments already invested whether the current market value of the property warrants a continued stake. It must be clearly understood that if you fail to complete the usual risk is that you will forfeit your full deposit.
Prior to risking the loss of your deposit(s) perhaps you should consider the following:
i) In addition to continued attempts to sell the property, you should consider whether the property, when complete, benefits from a rental guarantee or similar for a period which may be anything from two to five years. This will be clear from the PPC that you signed at the outset. Will this deliver sufficient income to justify completion and will it go some long way to servicing the mortgage payments? Will long and short term rentals be permitted in such property or is the “guarantee” given because the developer already had a willing rental market? Don’t forget the associated costs of property ownership in addition to the servicing of mortgages. These include community or urbanisation charges, wealth taxes and Town Hall refuse and rates type taxes.
ii) Talk to the developer. They may be willing to reduce the price particularly if you hold options over several properties. If you fail to complete when requested to do so they are unlikely to return your deposit but they will need to sell the property to recover their development and building costs. You may have already a good idea of the selling price that’s achievable.
iii) Are there any other tactics that could be employed to delay completion? Would a “snagging survey” be a useful weapon for your lawyer when attempting to ensure that the property should be completed to the Specification in the PPC? This is always assuming that the Specification in your PPC is sufficiently expansive and descriptive. Issue may be taken where the property to be completed doesn’t accord with the description in the Specification. A price reduction or a sum by way of a “cash back” payment from the developer may be the best solution for a failure to attend to the necessary remedial work.
iv) Should you try to get out of the PPC and seek to recover your deposit? The vast majority of PPCs are standard form agreements that invariably the purchasing client had no option but to sign unamended. A closer examination of the small print may disclose an opportunity, given the particular circumstances of the “build out” period, to argue that a stated completion date, as set out in the PPC, has not been adhered to and/or has been exceeded. Various of our legal colleagues have suggested that extensive, and totally unjustifiable delays, the total failure to commence any work at all or an other substantial failing, may well give rise to such a claim. It is often specified in the PPC that should such a failure exist then after a period for “curing” the breach, usually three to six months, the purchasing client may be entitled to rescind the PPC and demand the return of the deposit paid plus judicial interest, usually 6%.
Naturally every case depends upon its precise facts. We have seen some stronger and some weaker cases, but there may be merit in considering such action. You’ll need to ensure that your Abogado in Spain is willing to advise that action is feasible and that they are prepared to proceed with such action. It will involve, potentially, ripping up the PPC for you and by extension, many other purchasers in the same development. Requesting the developer’s guarantor to hand back hard cash back under the, now, legally necessary, Bank Guarantee.
There are a couple of elementary steps that can be followed prior to issuing legal proceedings. Experience has shown that developers and their Guarantor Bank have a tendency to negotiate a settlement rather than become embroiled in long drawn out litigation.
Should your developer not negotiate and you take the decision to pursue the matter through the Courts in Spain, with the guidance of an experienced Litigation lawyer, you should expect to wait up to a year for a decision “at First Instance”. This decision may in turn be appealable by the defendant developers and/or his Guarantor Bank.
Legal costs and expenses are not treated in the same way as they are in the UK. A potential claimant needs to be certain of receiving the most comprehensive advice before embarking on such an action. If they are 100% successful, I understand that there is a right to be indemnified for your full legal costs and expenses by the losing party – but not otherwise.
We are aware that many purchasers seeking information about the progress of their development are connecting with other purchasers via websites such as the aptly named, and really very good, www.eyeonspain.com. In this way they swap detail and update other purchasers on the progress of building etc. at their development. It may also be an appropriate forum to discuss what happens if the completion of your development is unduly delayed.
A number of parties have approached us in recent weeks worried by the appalling press following the “White Whale” money laundering scandal that had, at its heart, a Marbella law firm. The more recent, “Operacion Malaya” has seen the Mayor of Marbella, her Deputy, the Planning Chief, along with others, including several from the Town Hall and Police force, arrested for “trafficking in influence” and planning irregularities. These incidents have sent a shock wave through the purchasing community who are as a result questioning the value of information being received from several quarters including from their current advisors.
Some are now being told that the properties they are hoping to buy are now threatened with demolition as they were illegally build on land that was not classified in the first instance as that available for building. Alternatively, the developer has exceeded the density of allowable building or for one reason or another the development finds itself in difficulty when the developer seeks the all important Fin de Obra – a document confirming the Formal Completion of Works on a new property. Without this a Licencia de Prima Ocupación – the Licence to occupy a completed property - will not be granted. This will mean that services, such as electricity and water, will not be supplied by the utility companies, unconnected lenders will not agree to provide mortgage funding and insurance companies will not provide building and contents cover.
It's your lawyer’s job to ensure that there are no defect in the performance of the Licencia de Obra – or Building Licence – or the planning permission that has been granted that could affect the legitimacy of the property, its value or saleability.
Given the current situation in Marbella, a new temporary Town Committee has be constituted by the Malaga based Deputación of the Madrid Central Government, this will remain in place for the next thirteen months before the already scheduled municipal elections aimed at electing a new Mayor. The Junta de Andalucia, the Andalucian Local Government based in Seville, that had already removed the right to grant planning consents from the Marbella Town Hall pre-Christmas 2005, are readying themselves post Easter 2006 to consider all of the Building Licences granted by Marbella on a case by case basis. This will mean considering many thousands of licences and, for those developments where building and infrastructure are almost complete, it will have the effect of delaying the grants of the Fin de Obra and the Licencia de Prima Ocupación. This will in turn delay the actual date of Completion for many off plan purchases.
Stories persist of local developers putting pressure on lawyers who are being squeezed by banks in respect of final building finance to obtain completion of property even thought the property may not be legalised, registered or habitable. This should be avoided.
We appreciate that when you are dealing at a many hundreds possibly a few thousand miles of distance with a high value item such as a property purchase there are many fear factors involved. When you add to that the recent adverse press whether or not the property you are buying is actually sited in the Marbella region this may well be shaking your confidence. The physical distance aside, there are significant cultural distances that are also pretty alarming – imagine Weybridge or Macclesfield Borough Council being arrested on mass – its unthinkable!
You need a team including bilingual lawyers with whom you can properly discuss the issues of your purchase and provide you with commercial solutions.
In addition, you’ll need “the Family Solicitor” type role to be played in Spain for your ongoing benefit. You’ll need wills, you’ll need advise about long and short term rental agreements, key-holding and proper property management – now that you are about to become a “jet to let” landlord. You’ll certainly need a Fiscal Representative who will be responsible for the delivery of your annual tax return, the setting up of standing orders for the payment of your utility bills – you’ll only need to make sure the moneys in the bank!
www.Expatica.com (24.04.06) reported that the UK’s Financial Times has observed that expats are a driving force behind the Spanish economy and that expat purchases are accredited with sustaining Spain’s construction boom. Further, a Spanish property expert is quoted as saying that there is “…no risk of a property crash in Spain in the short or medium term thanks to new demand generated by immigrants". He goes onto note that immigrants will buy some 170,000 homes in Spain this year – almost one quarter of total demand for new houses.
Whilst this is a brave prediction it does reflect a market that has in built confidence and which expects to be here for many many years to come.
© Mark Wilkins, The Rights Group SL (Marbella) 2006
In Spain on 0034 600 343 917 or 0034 952 784 088
Please note that the information provided in this article is of a general interest nature and intended as a basic outline only. You are well advised to contact a professional for advice specific to your circumstances. Nothing contained in this article should be seen or taken as the writer or publisher providing legal or financial advice.
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