Buying a House, Apartment or Property in Spain

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Buying a House, Apartment or Property in Spain

The whole process of buying any type of property or land in Spain is strictly regulated.

Firstly you should decide how you would buy your property. There are three options:

• Buy for cash - a straightforward option, but once capital has been invested in a Spanish property it can be difficult to release equity although not impossible in some circumstances.
• Re-mortgage your main home to raise the cash - again, a straight forward option and one that doesn't involve you having to deal with any Spanish banks, but you will probably find that the interest rates charged by banks and building societies in other countries may be higher than interest rates in Spain. Bear in mind the mortgage warning, "Your home may be repossessed if you do not keep up repayments on your mortgage". You may be putting your main home at risk for the sake of your holiday home.
• Finance your property with a mortgage from a Spanish bank or mortgage provider.

The Initial Costs

Whether you are buying for cash or with a mortgage there are some costs you are going to have to fund yourself.

• The Deposit as your agreement to the purchase - On the day you sign the Option de Compra (the sales agreement contract) you will be required to pay your deposit, usually between 5% and 10% of the purchase price for older properties. For new properties under construction the payment terms are made in stage payments as the construction is completed. These terms should be negotiated through your agent or directly with the constructor. It is advisable to pay your deposit cheque to your agent who is representing you and not to the vendor. The deposit is held by the agent until completion.
• Purchase Costs - For all property and land you will pay 7% of the purchase price, which is a property tax that goes to the Spanish Treasury. In addition you will have Notary fees and land/property registration fee, which varies according to the purchase price of the property. You can choose your own Notary.
• Agency fees - Normal commission is 5%, which is included in the sale price.
• The costs of a mortgage

Mortgage

Mortgage arrangements

Normally, based on their valuation on the property, Spanish banks will lend between 60% and 70% to non-residents and 70% and 90% to residents. They will send a valuer to assess the value of the property; the cost of this is included in the charges made by the bank for the mortgage application, which varies according to the purchase price of the property. Allow about 1% but banks vary in their charges and this can often be negotiated. Once the mortgage has been applied for, funds will be needed to cover the cost of bank charges.

The essential elements for qualifying for a mortgage

1. Sufficient income to service your mortgage
2. Compulsory life insurance to cover the terms of the mortgage

Working out a price range

If a mortgage is needed to buy a property, establish a price range and determine if enough cash funds for the deposit and legal fees are available and if income is sufficient to afford the monthly cost of the mortgage.

It is strongly advised to seek professional advice about the basic lending criteria and the various options and mortgage products available. There are several options:

• Go directly to the Spanish banks and mortgage providers - the majority have English-speaking staff, others do not - which may cause time-consuming difficulties. Banks and mortgage providers have their own lending criteria - how much they will lend, the term of the mortgage, what mortgage products they offer and how much they will charge for their arrangement fees.
• Use the services of an established mortgage broker, who will provide advice about how much can feasibly be borrowed and the mortgage products which will best suit the circumstances. A mortgage broker may save some time and will know which lenders to approach on the buyer's behalf and will provide quotations from the most suitable lenders. Throughout the mortgage procedure the mortgage broker will liaise between buyer and lender, which can be very useful if the buyer's foreign language skills are not that good. Mortgage brokers who are registered in Spain receive their commission directly from the lender and generally do not charge a fee - but it's advisable to check, as this is not always the case.
• The Inmobilario (estate agent) may offer a mortgage service and usually will offer a service similar to that of a mortgage broker.

Banks will ask for pay slips of employed applicants or one or two years accounts if the applicant is self-employed. Tax declarations from the buyer's country of tax residence will be required.

Finding the Ideal Property

There are many ways to search for properties: estate agents, property magazines and ''home hunters". In more popular or urban areas you will probably find estate agents who offer an English-speaking service.

It's important to carefully consider the location and type of property, depending on whether it will be a  main residence, second home, holiday home to be let out on occasion or a property to be let as an investment for the future.

Make a list of the important elements - the purchase price, the overall size and number of rooms, whether a sotanos (cellar), garage, garden, terrace or balcony is essential- as it will keep the estate agent or home hunter on the right track to finding the ideal property.

The type of property and it's condition is also an important consideration. There are certain types of properties that will not be acceptable for mortgage finance. The property should be classed as "habitable" meaning structurally sound and having the basic utilities of electricity, mains water and sewerage system, all conforming to the current regulations.

All properties that are registered on Registro de la Propiedad (Land Registry) can be mortgaged.

Buying to renovate a property or build a new property demands careful pre-planning. Certain Spanish building regulations are very different from other countries and permission has to be granted from the local Ayuntamento (Town Hall). These vary from municipal to municipal and within each municipality there may be different zones that have different regulations regarding the minimum amount of land on which you can build. Detailed applications as well as other documents which state what developments are allowable on the property and its land, must be submitted to the town hall (certificate of town planning/urban development) . These permits are usually already obtained or will be obtained by the agent or the constructor before you sign. It is advised to ensure these have been obtained.

The advice of an expert - an architect or surveyor- will also be required for renovations and new builds. If relying on mortgage finance for renovation works, then the works will have to be completed by tradesmen who are registered in Spain. Registered tradesmen have required insurance covering their work - it is an essential guarantee for the bank or lender.

Purchasing Property

Once a property is found that is suitable and the vendor has accepted the offer, a sales contract must be completed (Option de Compra).

Option de Compra

The seller (vendor) or agent can draft the Option de Compra, which will be written in Spanish, but will usually have an English translation. The name(s) on the mortgage (is applicable) must also be the name(s) on the Option de Compra. The Option de Compra is a legal contract, therefore it is highly recommended to consult a Notary before signing. The Notary should confirm (at a minimum) that the following information is provided:

• Details and identities of the vendor and purchaser
• A full description of the property
• The surface area of the property and land
• The purchase price, the breakdown of fees and who will pay each fee
• Details of the sales agent
• Details of any fixtures and fittings included in the sale
• Details of the mortgage, the date of when the mortgage offer should be available and the date of completion
• Any let out clauses (conditions/cláusulas crio) and the penalties that will be incurred by the purchaser or the vendor if completion doesn't take place

The let out clauses

For the purchaser, the clause crio protects the deposit given to the agent as part of the agreement to purchase the property.

• The most usual is a clause stating that the purchaser's agreement to purchase is subject to obtaining mortgage finance.
• Other clauses can be included, such as the vendor having to carry out necessary repairs or that the sale is subject to the dimensions of the property corresponding to what is detailed in the Option de Compra (expert legal advice is useful in the negotiation of these clauses).

On the day of signing the Option de Compra the purchaser will be required to pay the deposit to the agent.

The Mortgage Procedure

Lenders are obliged to ensure that any person applying for a mortgage is financially able to meet the mortgage repayments.

Apart from a completed mortgage application form, life insurance form and a copy of the Option de Compra that has been signed by both purchaser and vendor, the purchaser will need to provide photocopies of:

• proof of identity - passport or Residencia
• if employed or receiving a pension - payslips from previous 3 months, P60s or tax returns, proof of any other income
• if self-employed or director of a company - 2 years trading accounts and tax returns
• bank statements (3 months) proving receipt of income and payment of loans, and adequate funds for the mortgage deposit

If buying a "new build" or wanting to include the costs of works/renovation in a mortgage the following will need to be provided:

• For renovation or improvement works - professional estimates or invoices from tradesmen registered in Spain as well as a copy of their insurance certificate
• For new-build properties - the property title or preliminary sales agreement for the land, building licence and the building contract and plans
• For re-finance or equity release - the title deed or loan deed with the complete repayment table

Life insurance is mandatory to cover all the terms of a mortgage. Most of the banks and lenders insist their own in-house policies are used and the medical underwriters may ask applicants to have a medical examination or tests.

When the application has been thoroughly checked and approved by an underwriter, the lender will request a valuation of the property. The valuation is not a survey. It is merely a valuation of the property to confirm the amount the lender is prepared to lend is acceptable.

Should the mortgage application be denied, either because of insufficient financial resources, the medical underwriting or the unsuitability of the property, the lender will advise the applicant in writing which can be used to obtain a refund on the deposit as agreed in the Option de Compra let out clause.

If the mortgage application is approved, a mortgage offer (hipoteca) will be issued in writing.

Some lenders will want their arrangement fee paid on acceptance of their mortgage offer and the life insurance policy will be valid from the date the mortgage offer was accepted.

When the lender sends you the mortgage offer they also inform the agent of the details of the mortgage. The completion date should be within 3 months of receipt of the buyer's acceptance to the mortgage offer.

Completion Day

After the mortgage has been approved arrangements can be made for completion of the sale. It is the buyer's responsibility to instruct the Notary to request the mortgage funds from the lender.

Once the completion date is determined, the buyer will need to make sure their Spanish bank account is open and funds are transferred into it in time for the completion date. Arrangements for building insurance will also need to be arranged as the buyer will need to provide details of the insurance policy.

If the buyer is unable to attend the signing of the Escritura (final deed of sale) power of attorney (a poder) may be given to a trusted person or friend, which authorises them to act on the buyer's behalf.

The Escritura is signed by the buyer, the vendor and one Notary.

Once the Escritura has been signed and witnessed the buyer must pay all required taxes, land registry fees and the purchase price. A few months later you will receive a certificate informing you that the title has been registered. The original title deed is returned to the Notary and you can collect the deeds and the Notary is able to make authorised copies

Mortgage Products and Their Uses

Re-mortgaging or re-financing in Spain has historically been difficult, though in 2004 and 2005 there were significant changes to the way some the banks and lenders were able to offer solutions.

A mortgage can be used to:

• Purchase a property which may or may not need renovation or improvement works
• Purchase a new property or one under construction
• Bridging finance - only available when selling a property in Spain to buy another Spanish property and only if supported by a new mortgage
• Re-finance an existing mortgage on a Spanish property and allow the borrower to reduce the monthly payments and/or benefit from lower interest rates
• Replace a loan in another currency that was used to purchase a Spanish property
• Release equity from a Spanish property

Choosing the right type of mortgage to suit the borrower's circumstances is essential.

Capital & interest repayment mortgage (variable rate)

Probably the most flexible of mortgage products. The interest rate applicable to the loan is revised on a regular basis. Should interest rates fluctuate, repayments stay the same - only the term of the loan is effected. A rise in the interest rate will increase the term of the mortgage and a fall in the rate of interest will reduce the duration of the loan. It is possible to make lump sum payments or pay off the mortgage early though early settlement usually incurs a penalty of 1%, which is negotiable. However, if the borrower converts to a fixed rate they will have to pay a penalty in the event of early redemption.

Capital & interest repayment mortgage (fixed rate)

Repayments are fixed for the whole term of the mortgage. The borrower knows exactly what they will be paying each month and how many payments they will have to make. Fixed interest rates are usually higher than variable rates. Financial penalties can be incurred for paying off the mortgage early, or changing to a variable interest rate. Each bank and lender differs and it is advisable to check exactly what their financial penalties are.

Interest only

Very few interest-only mortgages offered by Spanish banks are offered to non-residents

The Professionals Involved With Property Purchase

A variety of professionals are required when purchasing property in Spain.

The estate agent and property searcher

Estate agents (agents inmobilarias) are usually local to an area and therefore will only have properties for sale within that area. The agent earns commission from the sale of the property and will try to obtain the best possible price for the property, but will know what price the vendor will accept. They should also be able to give the buyer an estimation of all the other fees and the property charges for which they will be responsible.

Property searchers, as their title implies, will search for a property that is within the client's price bracket and matches their requirements. Many offer a personal service, taking the potential purchaser to view the properties they have short-listed. Some will charge a fee while others will take a percentage commission from the inmobilaria instead.

The Notary

The Notary is a public official and given the title of Notario. The Notary is highly qualified in the Spanish legal system and is able to advise about the property transaction as well as family, succession and corporate laws. The state confers powers on the Notary to legalise property purchase transactions that cannot be enforced by any other means. Notaries are Public Officials and provide legality to the contracts they supervise. They are liable for their professional actions. A Notary is responsible for the conveyance, preparing the various documents and confirming the seller's title to the property, checking that there are no other mortgages on the property, etc. The Notary is responsible for the legality of all documents that are signed before him in his personal capacity, which provides a guarantee for the client.

Mortgage Brokers

A mortgage broker will have relationships with various Spanish banks and mortgage providers, will understand how they react to certain cases and circumstances, and will act as the buyer's intermediary with the lender. Legislation ensures that mortgage brokers, or mortgage advisers, must have their own professional indemnity insurance and be registered with each bank and mortgage provider they represent.

With banks and lenders having different lending criteria and products, a mortgage broker should save the buyer a considerable amount of time in finding a lender that is suitable for their personal requirements, be able to advise on the various mortgage products, mortgage requirements and life insurance applications. They should also be able to provide quotations from lenders. A good broker will liaise directly with the lender, foresee and prevent some of the problems that can occur and guide the applicant through the Spanish mortgage procedure.

Mortgage brokers receive their commission directly from the bank or lender with which they do business. Some of those who are registered in Spain will not charge they buyer fees for their services- it is suggested to verify this early on.

Architects and surveyors

An architect or surveyor should be considered if purchasing an older property or one in need of renovation. They will have experience with planning and obtaining necessary permits and certificates, and be able to provide an estimate of the cost. They should also know of reputable registered builders who have their own insurance to cover their work, which is essential especially if taking out a mortgage for renovation or improvement works.

Property Taxes and Related Topics

There are two taxes on all residential property. These are collected by the State for the local authorities. These taxes are assessed at individual rates according to location and can vary substantially. It is advisable to ask the estate agent for these details when looking at properties to buy.

Taxes IBI (local taxes)

Due on all property registered at the Land Registry except agricultural land. The owner of the property is liable for paying this tax. Even if you only use the property on occasional visits, if it is furnished and supplied with water and electricity you are liable for this tax. The amount of this tax will vary from one place to another and according to the value of the property.

Basura (rubbish collection)

Town Hall tax for the collection of rubbish.

Both the above are paid to a local government collection agency called SUMA, each town and village usually has a SUMA office.

Comunidad (community charges)

For those owning property such as an apartment within a complex there are maintenance and service charges to pay. Potential buyers should consider these charges before purchasing. The charges will vary according to the size and quality of the complex, whether there are lifts, swimming pool, gardens, tennis courts and other facilities.

Spanish Succession Laws - the Law of Inheritance

Buyers are advised to draw up a Spanish will with a Notary to cover assets in Spain. If the owner's situation is more complicated, because of previous divorces, especially if they involved children and step-children, it is essential.

Capital Gains Tax and Wealth Tax

This is currently changing and you need to consult a professional tax advisor.

Patrimonial Tax

The Patrimonial Tax is a yearly tax based on the rateable value of the property. It is paid once a year, in December.

Buying Property to Let

Be aware when buying property to let that if it will be rented out more than once per year as holiday accommodation, it may have to be registered with the local Consejeria de Turismo de la Comunidad Autonoma (tourism board). More information specific to local requirements is available from the tourism board.

Further Information

• See AngloINFO INFOrmation page Capital Gains Tax on Real Estate in Spain
• See AngloINFO INFOrmation page Spanish Tax & Taxation in Spain
• See the AngloINFO INFOrmation page on: Wills & Inheritance in Spain

Article by Peter Weaver AIF 0569 Web: www.inmo-weaver.com
Tel: +34 965 833 230 / e-mail
Copyright © 2001-2006 Peter Weaver All Rights Reserved (Written January 2006)