If you’re able to finance the entire purchase of a property in cash then you are ready to make your offer. But most people nowadays typically engage a bank or a lender at this point to obtain a mortgage to finance a portion of their property purchase in Spain.
The mortgage system in general here in Spain is quite a bit different than back home. Unlike in Canada where most mortgages are amortized over a longer period (such as 25 years), but are renewable every five years, most Spanish mortgages are fixed for the entire term. What that means is a person can get a mortgage here for a certain interest rate, say 2.5% interest, fixed over the entire 20 year term – that’s as close to free money as you’ll find nowadays in my opinion, without the risk of interest rates changing while you own your home.
When I first started talking to banks about getting a mortgage, I realized that with my limited Spanish and short bank history the process was likely to be a bit difficult. My own bank, BBVA, looked over all my documents and basically said they’d call me back at some point. But other than an initial indication of the offer they might be willing to extend to me, never followed up with me after I expressed interest. Shortly afterwards BBVA changed their lending rules to make it harder to non-residents to obtain a mortgage here, so I didn’t pursue that avenue any further.
Thankfully there are mortgage brokers here in Spain that can work in English and generally have good contacts at the banks. If you haven’t heard of a mortgage broker before, essentially they are experts in obtaining mortgages, and often get preferential rates since they do most of the vetting on their side and also send a lot of volume to the banks.
One difference though is that unlike in Canada, where the bank pays a finder’s fee to a mortgage broker directly (essentially making the service free for the purchaser), here in Spain you often pay the mortgage broker for their services. While the costs for a mortgage broker generally vary, in my case I was presented with an initial scenario that my broker said they would be able to get me from one of their banks. At that point I was asked to pay €500 to formally secure the mortgage (this may have gone up), with the caveat that if they couldn’t officially obtain a mortgage that was the same or better than their initial scenario, it would be refunded. So I said sure.
When the offers came in, I initially had two different ones from two competing banks: 25 years, 2.9%, 70% down, or 20 years, 2.15%, and 60% down. As a non-resident (from a tax perspective at least, which I still am), typically the most you can obtain for a mortgage is about a 60% loan to value ratio (LTV). Residents can usually get 70-80%, but since I likely won’t be a fiscal resident for another few years, I wasn’t able to get 80%. The 70% was actually appealing, but the documentation required for that one likely involved me visiting the consulate here and authenticating some documents, which seemed like a huge hassle (with various unknowns).
As part of the mortgage broker agreement, once you choose to move forward with a mortgage, you need to pay an additional fee. Obviously the combined total isn’t cheap, especially when taken in the context of the overall cost of the property, but you really need to keep everything in perspective. First, I might not have even been able to obtain a mortgage on my own, which means I wouldn’t be able to even buy a property. Second, having someone handle the entire process while I was busy working was a huge relief. Third, the rates I obtained were far better than I would have been able to get on my own. I know a few friends of mine here who obtained mortgages through their banks and were given rates of around 2.9%: that difference alone, 0.75%, amounts to roughly €9,100 of interest over the life of the mortgage, so more than enough to make up for the €1,500 or so I spent.
While technically you don’t need to have a mortgage arranged before making an offer on a property, it will make the negotiation process (and subsequent closing) much easier if you do. So it’s probably a good idea to approach your bank or to engage a mortgage broker to obtain a pre-approval before you make an offer. You can certainly add a clause into the contract saying it’s dependent on you obtaining a mortgage, but to be honest it’s a bit of a bad deal for the seller since they are basically taking their property off for a month or two for your benefit alone. So many sellers will simply decline any contract with that clause in it. My advice is to make sure you can obtain a mortgage before you get that far.
Once you know you are set with a mortgage, it’s time to put in the official offer. The next post in this series will deal with that, so stay tuned.