We all know that there is uncertainty in the market at the moment and predictions are that interest rates will go up and that inflation will continue to rise for some time to come. This is having an impact on property buyers who require a mortgage, as rates are on the rise and buyers are having to react to maintain the historically low rates that they have been budgeting for.
Many lenders have already increased their interest rate and in June the European Central Bank announced that they intend to raise the key ECB interest rates by 25 basis points in July. They also said they intended to raise it again in September and anticipate gradual but sustained increases in interest rates to continue beyond then. The US Federal Reserve approved a 0.75-percentage-point rate rise at their June meeting and indicated it would continue lifting rates this year to try to combat inflation.
While of course this is a concern, these rises have to be kept in perspective, as interest rates have been at historic lows for some time now. Bear in mind that the Euribor has been negative for the last nine years, leading to super-low mortgage rates set at around Euribor plus 1.75 over a 25-year period. This means it’s been very cheap to obtain financing, and as the Spanish banks are taking their time to adjust their fixed rates, there is still time to get excellent mortgage offers but that window is closing. That’s why we’re seeing a rush to buy and secure finance at the lowest possible rate.
In order to avoid getting caught out by the increase in interest rates, we’re seeing buyers changing their agreements with the sellers and pushing things through quicker than they had originally planned. They are also seeking expert help from mortgage brokers to ensure they obtain the best possible deal.
For example, we’ve recently had a client who was super anxious to complete on his purchase as quickly as possible, so that he fell within the timeline for the fixed-rate offer he was given. He was aware that the banks were going to renew that product, so he brought forward his completion to the point that he didn't even move in. He let the seller live there for an extra month just so he could get that mortgage rate sorted! We’re seeing many more people doing the same, rushing through a property purchase to get deals done while rates are still low.
Predictions and recommendations from the mortgage experts
I recently interviewed the experts at Mortgage Direct and they predict a rise of around 50 basis points over the next few months. However, interestingly they noted that different banks are reacting at different times. This enables the brokers to choose the best bank and then get the rate fixed for between 30-45 days, to give the buyer and seller time to complete.
During our interview, they recommended choosing a fixed-rate mortgage, while the rates are still low but predicted to rise, and I would agree. Here in Spain, your interest rate is fixed from the moment you sign the mortgage deed. You don't have to go to the market again in two, three or five years as you would do in the UK and renegotiate better terms. So, it’s a bit of a no-brainer to choose a fixed rate option right now - you may be paying a little more to begin with, but this protects you for the long term.
The interest rate may be rising but financing is still attractive
While we have to think about changes in the market and predictions for the future, I wouldn’t let the rising interest rates scare you or put you off purchasing a property. Even with the increases, there’s still cheap finance out there. Mortgage Direct informed me in May that they could offer fixed rates between 1.5 to 2%, at that point, but this had already increased over the last three or four months from between 1 to 1.5%. For variable rates for non-resident mortgages, the price in May was around Euribor plus maybe 1.25 to 1.75%. Now while increases are expected, this is still incredibly cheap compared to finance options elsewhere in the world.
There are other savings you can take into account too. Recent laws passed in 2019 mean that the banks actually absorb a lot of the setup fees for the mortgage, saving a considerable amount of money. The banks are also now responsible for paying most of the fees involved in the purchase transaction, including what's called the AJD tax on the registering of the mortgage deeds. So that has significantly reduced the cost of actually getting a mortgage here in Spain.
I feel that for the foreseeable future, even with increases, obtaining a mortgage to buy a property in Spain will still be attractive.
Key facts about mortgages in Spain
Here are some key points to understand:
For non-resident buyers, most lenders will agree to 60%-70% of the purchase price or the valuation, whichever figure is lower.
You need to prove that you are able to cover the monthly repayments by providing your last 3-6 months' bank statements, payslips and a list of existing liabilities (other mortgages, loans etc), plus a credit report.
Once banks are armed with this information, a decision in principle can be given pretty quickly, normally within a week.
There is a compulsory 14-day cooling-off period. Buyers, or their lawyers if they have power of attorney, have to go and sign at the notary at least 14 days before completion saying that you understand the terms of the mortgage, to safeguard the banks. This means there is a delay on completion, even if you’re ready in all other regards.
*Sean Woolley is the founder and director of real estate agency Cloud Nine Spain.
*You can see Sean speak to the guys at Mortgage Direct all about mortgages in Spain on the Cloud Nine Spain YouTube below.