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Rose Financial Planning - Latest Issues

In these troubled financial days it is useful to share the knowledge and experience of those already living in Spain, as well as receiving professional input to common issues.

ITV's 'Spain - Paradise Lost' - a comment!
29 June 2009

 

ITV’S ‘SPAIN – PARADISE LOST?’
 
The same old stories really; folks buying either properties or even businesses without the necessary research and certainly without the right advisors to hold their hands!
 
The sad thing unfortunately is that many of the negative issues arising, and certainly for residential property purchases, the ‘holes’ into which people fall can and should have been avoided. The trick, of course, is for someone on the buyer’s side to know that the holes exist in the first place! That should be the solicitor under normal circumstances, but how many buyers consider consulting a Financial Advisor before they commit?
 
Take the cases used in last night’s show as examples, those in Cantoria and Vera in Costa Almeria.
 
Both sets of properties are deemed ‘illegal’ as they have been constructed on ‘Rustica’ land for which the development of urban homes is strictly limited without the correct consents. The clients all seemingly have the correct legal paperwork and some have had such for a number of years. Some bureaucrat has now decided that the builds are, in fact, illegal and are under threat of demolition. One cited case (that of the Prior’s in Vera) was demolished several years ago. €500k of spend up the Swanny!
 
As a matter of course when discussing purchases of property in Spain, and irrespective of the fact that the client can buy for cash (as is so with all the examples in last night’s screening) I would ALWAYS, and without exception, recommend taking a mortgage of some degree. Always!
 
Why? Numerous reasons but the primary one for these particular clients would have been ‘Title Protection’. To take a mortgage means that the bank is validating the legal paperwork. If the bank will not lend then why? That’s warning enough! But secondly, even if they do agree to a mortgage, to take a loan then reduces your own investment, and that capital can be retained by you in your name, safely, and invested to generate a return just enough to ‘wash the face’ of the mortgage interest cost monthly. So, having done just that, do you really have a mortgage? Not really, as at any time it can be paid off from the capital that you hold in reserve!
 
And, when issues arise (such as cited in the show last night) who is holding the risk of loss of money? Not you alone now as the lender will want to protect their own investment via the mortgage they have advanced on the property. And they have deeper pockets than you when it comes to fighting a legal battle! Would the Priors have lost their Vera home if a lender was involved? I doubt it very much. And, even if the bank could not stop the demolition, some of the Priors’ capital would have been retained in their name, safely tucked away for them to fall back on!
 
It’s common sense to take a mortgage – every time – whether you ‘need’ it or not!
 
On another note, there is now an insurance that can add an extra layer of protection. Referred to as ‘Title Protection Insurance’ it covers you for exactly the sort of developments that are the most often to occur around illegal builds. And for an average one-off premium of circa €400 a very, very small price to pay in the greater scheme of things.
 
You see the protection that people need is available; it’s simply a question of dealing with the right advisors in advance to ensure the ‘holes’ that you can fall into are removed from your path!
 
No property should be purchased without prior consultation with a Financial Advisor. Now you see why!
 


Like 0        Published at 16:30   Comments (2)


Financial Trouble Shooting 2009
14 May 2009

SPAIN – FINANCIAL TROUBLE SHOOTING 2009

 

Spain is not the UK, and that applies to most elements of life, whether it is financial or otherwise!

 

A rather obvious statement you might say, but then you may be surprised at how many folk make assumptions and act without any research into the mechanisms of financial life here, and then wonder why things go pear-shaped.

 

Whether your involvement in Spain is comprehensive (you have moved here as a permanent resident) or partial (perhaps owning a holiday or investment home), we have seen developments over the last year or so that would have likely impacted your wallet hard! But what to do to ease the pain, if that is possible?

 

Whilst not all things are, or can ever be, under your control, certain elements to your financial make up are, and it is these key elements that we need to focus on. Any improvement can remove or, at least, ease the position you are in and, not least, the anguish and stress that invariably come with financial pressures!

 

There’s an old saying that says ‘sometimes you cannot see the wood for the trees’. Translated into financial terms today it can be interpreted as the stress of dealing with everyday worries needs to be stepped back from. You can do but you certainly need to think differently than perhaps you have ever done before. Or get someone to help you!

 

So here are the areas to look at with the view to reducing costs and/or increasing income!

 

1)     Existing Mortgages – Payments high or hurting?

 

All Spanish mortgages work on a periodic rate review basis, and those borrowers who have found themselves in the unfortunate position of having a high rate at the last review are probably hurting and wondering what they can do to reduce the monthly cost. For those who receive their income in Sterling £ this has been exacerbated by the demise of the Sterling against the Euro.

 

Firstly, the good news! Come the next review date, with bank lending rates having fallen in recent months, you should see a much lower payment. At least, the majority will! It’s a question of what to do until then.

The bad news though, is that the cost of going into arrears is punitive and the consequence not positive. The lender may not pass the full benefit of reduced rates on if this were so due to the penalty clauses within the mortgage contract.

 

Understand though that lenders here are under a great deal of pressure viz the number of mortgages in arrears and repossessions. They will not want more and that fact, ironic as it may seem, is your strength. They will not want more! So, if you are finding it hard to maintain mortgage payments, talk to the lender (this is critical) with the view of achieving i) a ‘window’ of reduced payments (to the next review date preferably), and ii) a switch to ‘Interest Only’ (thus delaying capital repayments). It may even apply that iii) extending the term of the mortgage may help but be aware that this could involve legal costs in changing the contractual terms. Also iv) if the basis of the interest calculation is using the IRPH index this is not good news for the foreseeable future as the rate reductions we have seen will not be passed on quickly enough to you. Look to switch to the Euribor index where rate reductions have washed through already.

  

2)     Bank Assurances

 

Be mindful that banks in Spain have, historically, made certain protection policies mandatory alongside mortgage provision. This cannot be enforced any longer and therefore it may offer a saving to fing an open market equivalent if the policy is required, either by you or the bank.

You need to be aware of what it is you are actually paying for and whether this is truly needed. For example, you may have alternative Life Assurance in place which is sufficient for your own protection purposes, so an extra policy may be superfluous. Alternatively, Buildings Insurance will be required by the lender but the probability is that you get it cheaper! The bank will still require their name added as a beneficiary, of course!

But the savings to elect for an alternative policy could be a sizeable chunk … annually!

3)     Savings gone – Eaten away due to reduced income?

 

There are many reasons why a mortgage should always, always be taken when buying a property and this crisis has driven that fact home to many albeit too late! A mortgage is tremendously tax efficient but, above all else today, it would have ensured that you had savings and investments to use as a back up; ‘rainy day’ money if you like!

 

So many Brits buy for cash and then rue the day, and we are at that point now! But there is no harm in reversing that move i.e. you are sat on bricks and mortar with significant value which you cannot use … unless you take a mortgage to some degree. That will restore your liquidity … and sanity and remove the stress of life today!

 

So many folk are even considering selling up and moving back home! But why, when a simple mortgage can provide sufficient funds to get through this recession. If you decide in a few years still to sell, at least you stand a chance of getting fair value for the property! Today you are likely to have to give it away!

And neither will your end beneficiaries (children) expect you to scrimp and save to pass the property whole to them on your demise. They will certainly expect you to use the equity so that you can enjoy your life in Spain. After all, wasn’t that why you bought here?

 

If you haven’t considered this before – to release some cash from your home in Spain – perhaps now is the time to do so!

 

4)     Deposit rates through the floor and investment markets down … along with your income?

 

With the average bank deposit rate earning as little as 2% these days, and then taxed, coupled with the demise of the Sterling £/Euro exchange rate, many folk lucky enough to have capital to fall back onto are still struggling as their income has been decimated. Along with their pension income!

 

But, staying away from the highly volatile Stock Markets, returns can still be earned in excess of 7% per annum if not more and yet these investment are low risk. Surprising I know but a fact!

 

So, if your income has been pummeled of late, it’s time to take a fresh look at where your money is placed!

 

5)     ‘Paid Up’ UK Pension funds

 

Many such funds are often of a low value due to the owner’s relatively short period of employment with the provider.

 

For some holders it may be possible to encash these in full and, especially where you have broken UK Tax Residency, an added flexibility can certainly be made available to allow you to access part or all of the value, perhaps immediately.

 

Time to revisit your pension arrangements?

  

6)     Spanish Tax

 

You may think a bit of an oddity this as it has seemingly no bearing on the immediate subject of reducing your costs or increasing income …. or does it? The short answer is yes, it could, especially where unknowing property owners are paying Non Resident ‘Wealth Tax’ and where certain Spanish tax breaks are being lost. And tax laws broken incidentally!

 

The fact is that you may be paying taxes that you shouldn’t, whether it is now or in the future and as taxes are a constant cost, annually, the cumulative effect of getting it right could add up to a small fortune. And you will be legal!

Based on our own research, 7 out of 10 Ex Pats in Spain have an incorrect understanding of their obligations viz Spanish Tax and, worse, they are 'illegal' in that they have not followed the processes correctly and hence could be financially exposed. There are benefits to be had in doing things correctly! And it's the law!

 

So whether you think you are set up correctly or not, check your status out and the effect on the various taxes of Income Tax, Capital Gains Tax and Inheritance Tax.

 



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Mortgage payment Pressures - An Action Plan
27 February 2009

 

SPANISH MORTGAGE PAYMENT PRESSURES?
– AN ACTION PLAN!
 
Many, many mortgage borrowers are already under extreme financial pressure to meet the commitment of the monthly payment …. and we are only just entering into a recession which is likely to a protracted!
 
In many respects it is far worse for many borrowers in Spain with a £ income (as opposed to their counterparts in say the UK) because of the recent demise in the £/Euro exchange rate!
 
So what can be done to ease the worry of it all and, on a more practical note, what can be done to lower payments?
 
My comments are relatively simple and obvious but, in stressful times like these, it is sometimes difficult to see the proverbial woods for the trees!
 
1)     Emotion
 
Employing emotions into a financial exercise is fraught with danger. It mists the eyes where clarity is critical! So, whilst I understand that this is easier said than done, do try to look at the hard facts alone!
 
2)     Financials
 
It is the combination of i) a weakening £ (to fund Euro mortgage commitments), ii) an increase in mortgage interest rates and iii) sliding property values that has created the issues that you are contending with today. So let’s look at these a little closer.
 
i)              Exchange rate.
 
You have no control over this and there is little clue in the basics as to which way the rate is going to go i.e. that £ will strengthen and require fewer pound notes to convert to meet those mortgage payments in Euros, or even weaken further! So, if you have no control, emotion plays no part …. other than to cause you stress which could lead to poor health!
 
ii)             Interest Rates
 
Many Spanish mortgage rates are set at intervals and reviewed periodically (normally annually - like a Fixed Rate). Unfortunately for many borrowers who had their own review dates fall in the last quarter of 2008, the driving index, the Euribor, was at its peak, which has led to the rate being set at very high levels. I have seen pay rates at 7.34% whereas, if that all-important review date was falling due now, the pay rate would be sub 5% and perhaps as low as 4.5%. What a tremendous difference!
 
Now there are several elements of good news here, and it is this that you must grasp as this is very important!
 
Firstly, banks know that some of the review pay rates are very high in today’s terms and also that, come the next review, the pay rate is likely to be much lower. So, where borrowers are struggling to meet the current high monthly payments, they can afford to be a little lenient for, in x months time, upon the next review, the payment requirement will fall!
 
Secondly, the Bank Of Spain (BOE) has instructed banks to adopt a far more (than normal) flexible approach to arrears and specifically for real hardship cases as a consequence of unemployment or even a death! The norm here is 3 months before recovery action begins; the BOE have requested banks to consider restructuring payments with a 2 year process in mind! Quite a difference! I am aware of several banks taking the lead and writing to clients to offer reduced payments for the immediate future, 6 months, and that reduction is a significant size; 40%! That is a big, big help!
 
If you look at this logically from the bank’s perspective, if the client can pay the ‘Interest Only’ part of any repayment, the debt is not increasing so that, in a market where mortgage defaults have shot through the roof and the banks themselves are under extreme pressure, surely that is good news for them!
 
They also know that the cost of switching away to another lender is expensive; normally 5% of the borrowing. So, with such a cost, unless there are other drivers (such as switching to ‘Interest Only’ and/or extracting ‘cash’) you really must stay put.
 
iii)            Property values
 
In the last 12-18 months the average property value in Spain has fallen significantly, perhaps 20-30% subject to the property type and area. The Costas have been hit hardest because so many units have been built and there is such an excess of supply over demand. That slack will take a long time to take up so there will be continuing pressure on values for a considerable while yet.
 
And this reduction in value, when combined with overly eager lenders offering (in some cases) up to 100% of finance not a year or so ago, has added fuel to the fire of massive overbuild. Not good for the banks and hardly surprising that so many Non Residents in particular, with little or no investment of their own capital in their property here, have decided to simply to hand the keys back to the bank to walk away!
 
3)     Action Plan
 
There is nothing elaborate about the lists of actions to be taken; they are rather obvious!
 
i)              Talk to your lender!
 
Do not stick your head in the sand! Most banks will want to see a positive rather than a negative from you and, as I have suggested, they will be aware of all the facts that I have mentioned above.
 
Tell them that you cannot meet the existing level of payments and that you want to reduce such. Many will have schemes already in place to offer you. Most will be prepared to accept the ‘Interest Only’ element. The alternative of you not making any payment at all will be their worst case scenario so you are not in a position of weakness as you probably think! As I have said above, I have seen payments reduce by 40% and I am sure this will make a difference to you!
 
Remember also that the BOE have given their own directives; banks will not want to upset their regulator!
 
Be mindful though that a) there could be an arrears charge levied by the bank for each and every partial payment and b) you do NOT want to let the mortgage account slip towards repossession. Hence, constant communication with the bank is essential!
 
ii)             Cancel the mortgage payment authority with your bank
 
If you cannot make the next payment, and there is a delay or a dragging of heals with your lender making a positive decision, then consider cancelling the exist payment mandate with your Spanish bank (if different from the lender) and then make manual monthly payments to suit your budget. Tell the lender this a) to advise them of the action but also b) to add pressure to them to put a formal payment plan in place. If your bank is your lender, then simply send over what suits the budget! Same result!
 
iii)            Consider a Remortgage and to remove equity by increasing the mortgage size
 
This may seem to fly in the face of logic, especially where you are struggling to meet the existing mortgage payment let alone a higher mortgage still BUT a) where the current pay rate set by the existing lender is way over a ‘new’ rate (remember that comparison 7.34% versus 4.5%!) and b) where your present arrangement is both Interest AND Capital, the result in the ‘new’ mortgage will show a much reduced monthly payment commitment. AND, if you drawdown extra capital you can then use this to meet the mortgage payments for a number of years – taking ALL the stress, worry and cash flow commitments away from you! Let the Spanish property pay for itself!
 
Remember that, to take extra capital out of the property, or even to switch your mortgage to another lender for preferred terms (‘Interest Only’ for example), the maximum Loan To Value that can be considered is only 60% really (in some cases 70%) so, if you are already at or above this level of borrowing this idea will not work! AND, you cannot have any existing arrears as no bank in Spain will accept such when considering a new proposal.
 
I hope the above assists in some small way!

Rose FP



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