Why Choose Interest Only For Your Spanish Mortgage

Published on 11/05/2009 in Buying Process

Mortgage applicationIf you have a property in Spain with a Spanish repayment mortgage, ask yourself if you have recently been worried about any of the following :-

The credit crunch Interest rates and mortgage rates Currency Exchange rates Property price crash Banks going bust Unemployment

If none of the above has concerned you recently, congratulations - you can continue moving through life with your head in the clouds and are probably beyond saving. Just kidding - if you are unconcerned about these things, good luck to you. In reality, almost everyone has been touched by the financial meltdown, but we aren't completely helpless. If you have a repayment mortgage in Spain, you can take reasonable steps to protect yourself from the economic uncertainty.

The credit crunch

This phrase has become so ingrained in our lives in the last few months, that it seems to now cover a whole range of problems and disasters that have been occurring. In basic terms, the credit crunch is affecting your Spanish bank in some regard, and is probably worse than they have admitted. This is affecting their ability and willingness to lend money on decent terms. Go ask them if you can modify your mortgage and the manager will stop crying into his con-leche and laugh you out of the (empty) branch.

Switching to an interest-only mortgage will ensure that your monthly commitment is as low as possible. Whatever financial disasters occur, you only have to pay the interest amount each month. Keep the savings aside for a rainy day.

Interest rates and mortgage rates

Base interest rates in the eurozone are on the floor. Down to 1% in May 2009. Great news for my Spanish mortgage you say. Not so fast. It isn't quite that simple. Your mortgage is probably based on the annual Euribor, which is 1.7%, because the banks are still uncertain about lending to one another over a 12 month period. Then you have the bank margin of at least 1%, so you are paying 2.7% as a best case. But very few people are. If your annual rate changed in November 2008, then you are likely to be paying about 6% until November 2009. If you are on the IRPH rate, an average of bank rates, then you will be paying a rate that is much higher than the Euribor and is falling much more slowly.

Switching to an interest-only mortgage could get you on the much lower monthly or quarterly Euribor rates. Take advantage of the low Euribor now, until the inevitable increase in rates as the financial systems settle down and inflation starts to reappear in the economy.

Currency Exchange rates

You bought the property when 1 of your British pounds bought nearly 1.5 of those new fangled Euro thingies. The mortgage rate was low and the payments were easy when the pound was strong. Now it's almost one-for-one and each pound only buys a bit more than one euro. That hurts.

Get onto interest-only. It's the only way to minimise the amount of pounds you are converting to euros. Save some sterling elsewhere and pay off a lump in the future when the pound is stronger. But don't keep sending pounds to pay back your capital amount when the euros are so damned expensive to buy.

Property price crash

It's a disaster, Spain is full of empty properties and they are all worth less than a used Ford Cortina (remember those - a Ford curtain. Very odd) Actually, it isn't going to be so bad, as these things always go in cycles. But it might be a bit sticky for a few years. You didn't buy the property in Spain to make a fast buck though, did you? So lets assume you are going to hold it for 5-10 years.

Why switch to interest only though?

Well, if you have negative equity at the moment, then you are paying back capital owed that is more than your asset. That just seems wrong. Ok you are effectively paying back money and saving, but there are so many reasons against that at the moment. Pay only the interest. You have a property to use or rent out. No redemption penalties mean you can repay a chunk when you are feeling flush and it feels right again.

Banks going bust

Some other bank is always going to pick up the loan book, so you can't get away with it if your bank goes bust. Imagine that, wouldn't it be cool if your mortgage liability dies with the bank. Sadly it's not going to happen. What might happen though is that there is a big disruption in the Spanish system, that hasn't happened yet. There is going to be blood, and there will be a level of consolidation never before seen in Spain. What won't accompany this turmoil is decent products and service. Already the banks are so unhelpful to existing clients. Remember how they fell over themselves to lend to you in 2004. Those days are gone my friend.

How about some UK banks that have already been through the pain of the credit crunch and forced mergers, and are starting to come out the other side? You can have more innovative products, and customer service that you can shout at in English. Pay interest-only and you can sit pretty watching the Spanish banks collapsing.

Unemployment

Not nice when it happens, and you probably won't see it coming. If you are made unemployed, and it is on the rise, then how do you pay your repayment mortgage ? Unemployment affecting others can also impact you. The uneployment rate in Spain is heading rapidly for 20%. This will hurt the whole economy in Spain, and the strain will be felt by the Spanish banks, who will have to get more money in from their remaining solvent clients.

If you are only paying the interest on your mortgage, then you are more likely to get through an unemployed period yourself, and your exposure to the problems of general unemployment will be minimal.

So, lots of problems that can affect your Spanish mortgage, and one simple solution available that allows you to take as much control as possible in the current situation.

Written by: Chris Norman

About the author:

Chris Norman is Managing Director of several mortgage broking businesses, dealing specifically with the Spanish and overseas property market.




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Comments:

Edward Cozens said:
23 April 2012 @ 08:10

I am looking for some one with 120000e who is not earning any interest in the Bank, and would be interested in 6% tax free for 3 years max.
Our property is worth 180000e,no mortgage or loans outstanding. Interest paid anualy or monthly.No redemption fees. E.C 952448268



P Clarke said:
26 July 2010 @ 19:12

I would like to comment on this advice because our 2 year interest only mortgage with BBVA spain on our spanish property came to a end in April and they put it to full repayment which is more than double, we had asked 2 months prior to this what would happen they told us dont worry we will sort it, we could not afford the full repayment and told them this, their answer we no longer offer interest only mortgages, so asked for it to be refered to a higher department which they did and made many phone calls and emails asking what was happening which they rarely replied to but finally 3 months on we have been told NO so we have no option but to hand back the keys and lose approx £70.000 in the process so i dont belive your advice sorry.
We had never defaulted on the mortgae have a long term tenant paying rent which they can see in the account every month it does not make any sense surely something is better than nothing.



michael ward said:
05 May 2010 @ 13:40

i have a morgage with caja madrid in ayamonte spain. i would like some advice if possible.because i have been a very bad product. many thanks


Kevin Chapple said:
15 November 2009 @ 20:10

Could you please send me a contact number/address for Chris Norman please?

Regards

Kev Chapple



tonybave said:
13 May 2009 @ 12:59

I find the whole re-mortgage thing very tempting (my current bank Banesto is charging me a whopping 6.14% interest on my loan) but also very confusing. From what I've read, re-mortgage is much more complicated and costly than in the UK. I've seen people talking about 4% up to 15% of the cost of the loan! I've heard about "subrogation" and new loans. Also, some banks have minimum amounts (Halifax weren't interested on any loan less than 100,000 euro!) and maximum LTVs of about 50%. Given all the complications and costs, I wonder if it is worth simply asking your bank for a better deal? It works okay in the UK? Any suggestions?


derek55 said:
12 May 2009 @ 10:07

Re-mortgaging in todays market is dependant on the loan to value LTV. Banks are more cautious today and are unlikly to offer a deal above 70% LTV.
With property prices diving the chances are that your current mortgage could be higher than the bank valuation.

Don't forget if you can find a lender, costs still have to be paid
typically, 1% to walk away from the old mortgage.
1% fee on the new mortgage and don't forget all the legal and Notary fees are payable again


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