Spain Mortgages

This might seem like a gimmick, but I assure you it's actually happening. The depressed state of the Spanish housing market means that many developers and some private home owners are now offering rent to buy schemes to entice buyers to enter contracts now, instead of holding out till the market recovers.

Here's how it works. The buyer and seller agree a time period for the contract, anywhere from a year to five years. The is a contract for sale, and is binding on both parties to complete the contract within the specified time period.

The buyer pays a deposit, typically 5-10% of the sale price, and this goes directly to the seller. It isn't held in trust, though legally it is a deposit so being a deposit should be refundable in the event the contract fails.

Then, for the duration of the contract the buyer pays a monthly rent that both parties agree to. This could be a fair market rent, or some other value, perhaps a nominal fee, or a higher than normal fee. The rent is not dead money, every payment is deducted from the sales price, so could be considered similar to a mortgage payment.

At the end of the contracted period, a balloon payment is required to complete the purchase. Typically this will be paid by the buyer's bank after they've successfully obtained finance.

Sounds good right? There are a couple of gotchas, and I think anyone entering a rent to buy agreement needs to be aware of these. First, the deposit goes directly to the seller, and isn't held in trust. Real estate agents might try to convince you this is normal and that the seller is taking all the risk.

My opinion is that the seller holds all the power, if they have your deposit, and they own the property, well anything that goes wrong could affect the financial well being of the buyer.

Secondly, a contract of this nature is likely to be taken up by two types of buyer. Those who are desperate and don't have access to finance now, and those who see this is a great from of bridging finance whilst they arrange finance or sell another property. In both cases, I believe there is a danger that they might be too quick to sign without properly reviewing what they are getting.

In particular, I would always encourage treating this as a full contract for sale and purchase, and any responsible person would have the property inspected and valued, boundaries checked, access rights determined etc. Sadly, I've heard of instances of boundaries being changed in rent to buy agreements after the contract was signed, and the buyer then having to undertake legal action to protect their investment.

On the plus side, this is a great way to purchase a property, and be in a position to make modifications, or redecorate, and all with the advantage that finance arrangements can be delayed until the economy strengthens again.

My recent posts on Spanish mortgages, inspired by my desire to note what I learn about property investing in Spain, has led me to thinking that I really need to write about the top banks in Spain for prospective mortgagors.

Regardless of where in Spain you are, the major retail banks are all represented, but in some areas local banks might have a bigger presence, for example in Andalucia where Unicaja dominates in number of branches.

Spain's two biggest banks, Santander and Banco Bilbao Vizcaya Argentaria (BBVA) tend to be represented in every town, as are the other major banks Caja Madrid and La Caixa, although not in most small villages.

In the smaller villages you'll often find a local bank and La Caixa represented, and if there is a large expat population then a dedicated branch with English and German speakers of one of the larger banks might also be present.

Santander also owns Abbey National in the UK, so their mortgage offerings have recently become very competitive and much better attuned to the needs of expats from the UK and Northern Europe, forcing the other major mortgage lenders to play catch up.

This has led to a very competitive market for mortgages, and may see further consolidation of Spanish banks in the future. whilst spanish banks are generally unaffected by the current global financial crisis, they are sitting tight and not looking too keenly at expansion, but once foreign markets regain their strength Spanish banks are well placed to make acquisitions.

Within Spain this could see mergers or take overs amongst the biggest banks, Santander and BBVA in particular being in a strong financial position.

In terms of where to get a mortgage, mergers and acquisitions rarely affect existing loan contracts, but can lead to branch closures, especially in the smaller towns. Ronda for example is a town of just 40,000 people yet has around a dozen branches of Unicaja, and in the event of a take over could see many of these closed.

The largest mortgage lenders in Spain are;
Bancaixa, Banco Pastor, Banco Popular, BankInter, BBK, BBVA, Caixa Catalunya, Caixa Galicia, Caixanova, Caja Duero, Caja España, Caja Madrid, CAM, IberCaja, Kutxa, La Caixa, Sabadell, Santander, and Unicaja.

The housing market in Spain has taken anther blow this morning with the news that Santander bank, Spain's largest mortgage lender, has applied for permission to suspend repayments to investors of it's Santander Banif Inmobiliario fund.

Santander has invested in thousands of properties that are rented and the fund has a combined value of 3.2 billion Euros. Investors who are dealing with the current financial crisis had asked to withdraw their funds.

Under Spanish law, if a fund receives requests for withdrawal totaling more than 10% of the funds value they are able to apply to the government for a halt to repayments until liquidity levels are restored. The recent window for withdrawals that closed on 13th February saw requests for withdrawals at 80% of the funds value.

Today's announcement effectively means that 42,300 Santander investors will now need to wait 2 years before being able to withdraw funds, although this has no effect on the properties owned by the fund. Find out more about mortgages in Spain.