There is one particularly important piece of news for buyers interested in Spanish property. The Bank of Spain has issued a directive that came into effect as of 1st January 2018, instructing Spanish banks to tighten up their lending conditions for a Spanish mortgage. As Spanish Property Insight reports, this will hit anyone applying for a Spanish mortgage that is seen as “risky” and it will also affect developers looking for loans to buy land.
Spanish Mortgage – What you need to know
This move by the Bank of Spain is not some random, Spain-only action; it is actually intended to bring Spain into line with international regulations. Essentially, what it will do is limit loans for land purchases to 50% of the sales value, and the criteria for mortgages on properties will be tightened up for those seeking a mortgage that is over 80% of loan-to-value.
If you are a buyer who will need a larger Spanish mortgage, then be prepared for tighter inspections by the banks you apply to with regard to your income and expenditure. The banks have been instructed to establish a ‘loan-to-income limit’, which is effectively the mortgage as a percentage of a person’s monthly income. If the percentage comes out above the bank’s set limit, then the banks will not grant the mortgage.
There are other aspects of the directive that affect buyers in Spain. For example, if an owner defaults on payments for more than three months, the provision form the bank must be 60% applied to the amount not covered by the Spanish mortgage guarantee. There is also a new value of the guarantee. The new directive has changed this from the value of the property at the time of the mortgage approval, to the value based on a new valuation, which is likely to be 40% less.
Fuster Associates, experts on Spanish property laws, state that the government has taken this step to introduce more transparency into the Spanish mortgage market. The previous two years have been a difficult one for Spanish banks with regard to mortgages, as the legal cases over the ‘floor clause’ proved. It is hoped the new directive will bring more security to the property market, increase consumer protection and remove the litigation issue that rocked the banks in 2017.
Fuster also points out that banks will be prohibited from “cross-selling of other financial products together with mortgages, making it impossible for banks to offer an ‘extended strategy’, which links the interest payments for mortgages to life or unemployment insurance, pension plans and credit cards.”
It will undoubtedly be several months before everyone involved in the Spanish property market can assess the impact of these changes on the market, and whether or not the government and Bank of Spain will succeed in its aims of keeping mortgage cases out of court, as well as ensuring that consumers have clearer information about mortgages, as well as a more streamlined and transparent application system, which as yet has not been designed, according to Fuster Associates. We will keep you updated about this situation, and suggest that buyers discuss the terms of this new directive with the Spanish bank they are applying to for a mortgage.