When buying a property in Spain, similar to Germany, one must find a bank that will finance a portion of the purchase price. Unfortunately, German banks often decline, as they find property financing with collateral in the Spanish land registry too complicated and time-consuming. In addition, new regulations since June 2019 further complicate the process.
In general, the only option remains to finance through a Spanish bank. However, there are some differences to consider compared to classic property financing with a German bank:
Documents:
Just like in Germany, it is important to bring all necessary documents to the initial meeting with the bank. These include the land registry extract, an appraisal report (preferably from TINSA), income tax assessments from recent years, and a draft of the purchase contract. Having all documents from the beginning is crucial as otherwise time is wasted when the bank repeatedly requests additional documents. Also, note that decisions are often made by the head office, which can slow down the process at local branches.
Financing Volume:
The ratio between the purchase price and the required financing (LTV; Loan to Value) is no longer the decisive factor for loan approval. In the past, it may have been different, but banks have become more cautious due to the losses they suffered during the previous property crisis. Today, it is crucial to be able to prove to the bank that you can pay interest and principal from your own income.
Interest Rates:
Spanish banks primarily offer variable interest rate loans based on the EURIBOR 1 year plus a margin. The exact margin is negotiable but usually around plus/minus 1.5%. However, there is an increasing number of Spanish banks that also offer fixed-rate financing.
Communication:
It is advisable to choose a bank with German-speaking staff to reduce translation costs.
Collateral:
Unlike in Germany, Spain does not have a mortgage, but rather a strictly accessory mortgage. This means that the mortgage only exists as long as there is a claim. Therefore, Spanish mortgage deeds are often extensive, as the entire loan agreement must be detailed. In the event of non-payment, the bank has the right to initiate foreclosure and force the sale of the property. Since June 16, 2019, there have been changes in the process of property financing in Spain due to Law 5/2019 of March 15, regulating mortgage contracts.
This law transposes a consumer protection directive from the European Parliament from 2014 into Spanish law. It includes new regulations, including:
- “Floor clauses,” which require a minimum interest payment regardless of the EURIBOR’s development, will be prohibited.
- Foreclosure of the mortgage can only be initiated when the unpaid installments exceed 3% of the loan agreement or after 12 (previously two!) months of non-payment, and this only applies during the first half of the loan term. In the second half, these values increase to 7% or 15 installments.
- Fees for the transfer of the loan to another bank, where the borrower may have found better conditions, are prohibited.
- In the case of early repayment, the fees charged by the bank will also be reduced: 2% of the capital in the first ten years and 1.5% for the remainder of the term. For variable rate financing, the maximum fees are 0.25% in the first three years or 0.15% in the first five years.
- In the case of residential property financing by a natural person, default interest rates may not exceed 3% above the contractual interest rate.
- A significant difference compared to the previous regulation is that the bank must bear all costs arising from mortgage financing, including notary fees, land registry fees, and mortgage tax. The borrower only pays the appraisal fees for the property. However, the bank can still charge an opening commission fee.
- Granting the loan must not be conditional on the customer purchasing additional products such as insurance from the bank. However, the bank may provide interest credits if such products are chosen by the customer.
- A key aspect of consumer protection is that the contract terms must be communicated very transparently and openly to the customer, especially the annual percentage rate (TAE; Tasa Anual Equivalente). An important innovation is that the bank is required to provide the customer with a binding offer (oferta vinculante), called Ficha Europea de Información Normalizada (FEIN), at least ten days before signing the mortgage loan. Additionally, extensive documentation about the planned transaction must be provided, including a summary of the key clauses, interest and repayment schedule, draft of the mortgage deed, and a breakdown of costs associated with the mortgage security.
- A preliminary appointment must take place with the notary, where the notarial recording will also occur (and the borrower is responsible for selecting the notary) no later than one day before the recording. The customer has the right to be advised and informed by the notary during this appointment, where the bank cannot be present. Ultimately, this leads to an interrogation of the customer regarding their understanding of the contract clauses, obligations, liability, and the consequences of non-payment. A notarial protocol (acta de transparencia) must be prepared, and this service by the notary is free of charge in practice.
This rather complex procedure explains why foreign banks have practically given up on real estate financing in Spain, as compliance with this process requires a physical presence or representation on-site, which can incur high costs. It is actually a pity because while the legal regulation may serve consumer protection, it does not promote competition among banks.
This is a machine translation of the German article.