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27 Oct 2016 13:01 by Smiley Star rating in San Pedro de Alcanta.... 2502 posts Send private message

Smiley´s avatar

Enquiries of this nature seem to be on the increase, so I decided to post this following a recent enquiry from a prospective client requiring construction/development finance as there seems to be some confusion over the way the Spanish assess these types of mortgages. Hopefully this will help people who are thinking of building their own house in Spain to avoid a pitfall, whereby they have to realign their sights in terms of what they will be able to do.

Largely speaking banks in Spain consider construction finance as high risk and with a lot of justification! There is a plethora of unfinished houses and villas in Spain where developers have run short of funds, have encountered insurmountable problems with the land etc. Hence Spanish banks tread extremely cautiously when assessing self build mortgages and many banks prefer to turn their backs on them altogether.

While I am sure that a land owner trying to sell the land will be telling you it’s no problem to raise finance, the buyer must remember the prime motivation of the seller is to offload their plot and they will be your best friend until the money is in the bank and while finance can be arranged, it is not as straightforward as many think.

These days the few lenders that will consider anything reasonable on development mortgages run with the same criteria that the applicant must purchase the land in entirety and have clear Title first of all. No such thing as a bank lending money to help purchase the land!

While all lenders market their construction mortgages as based on Loan to Value, it is an easy mistake to make to reach the assumption that this is the value of the finished project which obviously incorporates the value of the land.

Risk Management (otherwise known as sales prevention) departments at lenders take a wholly different view and while they advertise Loan to Value, lending is assessed solely on the costs of construction.

In order to put this in figures assume:

Purchase of land           250,000€

Construction costs        300,000€

Total outlay                   550,000€

It would be quite feasible that the finished property valuation could be in the region of 700,000€ (prior to lending a bank will require an official valuation report from a Tasador whereby all the plans and licences will be scrutinised so the pre-valuation is in effect based on an educated “artists impression” assessed by a Technical Architect). However lending will only be assessed on the 300,000€ construction costs – if we assume a lender offering 70% LTV, this equates to 210,000€.

If a lender is offering 70% Loan to Value, for the less well informed, it would be easy to assume this would result in a loan of 385,000€ (70% of 550,000€), or in one situation recently the client assumed it would be 490,000€ (70% of the 700,000€ completed project). The problem in the latter case is that the applicant had borrowed money from a family member to purchase the land and assumed he would be able to pay back borrowings from the mortgage raised in Spain!

One final point on the subject. For any lender to consider construction finance in Spain the land must have all of its planning and approval licences for urban development. It is impossible to borrow money from a Spanish bank to build a house on rustic land so in every aspect, it is a buyer beware situation.


Smiley -

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27 Oct 2016 13:17 by mariadecastro Star rating in Algeciras (Cadiz). 9298 posts Send private message

Legal Questions? Speak to Maria Direct

Thanks Smiley. Very educative


Maria L. de Castro, JD, MA



El blog de Maria

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27 Oct 2016 14:10 by Smiley Star rating in San Pedro de Alcanta.... 2502 posts Send private message

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