Wednesday 29 July 2009

MORTGAGES FOR YOUR PROPERTY IN SPAIN


At the time of writing, the amount of borrowing that banks are prepared to provide varies considerably. Equally, the computation of what they will lend with regard to a given mortgage in Spain is difficult to determine as anything more than a generality.

The preferred method for banks to establish the viability of providing a mortgage in Spain is to find out the ability of the person concerned to make regular mortgage payments. This is called the debt/income ratio. Lenders normally assess net monthly income after deducting worldwide debts and then come up with a maximum possible monthly payment. This then defines the size of mortgage they will grant together with its term (5, 10, 25, 30 or 40 years etc.). Normally the debt/income ratio is between 30% - 50%.

You may, for example, earn 2,000 Euros a month net. However, you may also have a car loan and an HP agreement amounting to 200 Euros a month. If this the case, then the following computations could be made:

40% debt/income ratio

Income of 2,000 E pm multiplied by (say) 40% = 800 E

Less loan and HP debts (200) E

Maximum potential monthly payment = 600 E

This would allow you to have a mortgage on your Spanish property of 100,000 Euros if it was for 25 years at a 4% interest rate. The monthly premiums would be 527 Euros pm – a little less than you can actually ‘afford’.

50% debt/income ratio

Income of 2,000 E pm multiplied by (say) 50% = 1,000 E

Less loan and HP debts (200) E

Maximum potential monthly payment = 800 E

This would allow you to have a mortgage of 140,000 Euros if it was for 25 years at a 4% interest rate. The monthly premiums would be 738 E pm.

Obviously, the maximum amount that your lender decides you can pay and the size of mortgage that you will be granted varies depending upon the interest rate applied at the time and the length of the term of the Spanish mortgage. Accordingly, the computations above could change significantly depending upon given conditions and the computations used. However, as a ‘rule of thumb’ they are a useful guideline.

Finding the right mortgage for your Spanish property is always difficult and there is much to be gained from taking independent professional advice. This is provided by a range of mortgage brokers both native Spanish and North European. The latter are frequently professionals who have settled in Spain and within these there are some brokers who are British and have relevant UK qualifications and previous mortgage broking experience.1

Tuesday 28 July 2009

NEGOTIATING THE PRICE OF YOUR SPANISH PROPERTY


Unfortunately, negotiating the purchase price of your intended property in Spain is not always simple. This is because the seller may have two sale ‘prices’:
· The declared price. This is the sale price that will be placed upon the Escritura (deeds) and that will be the price upon which you will pay purchase tax (7%) and upon which the seller will pay any Capital Gains Tax (18%).
· The real price. This may be different from the declared price and include a proportion of ‘black’ money. So, for example, you may agree to buy a property for 300,000 Euros but only declare the sale price as 275,000 E. In this case, the Escritura will state 275,000 Euros and you will pay 7% purchase tax (and the seller any CGT on profit made) on the 275,000 Euro value - rather than the ‘real’ value of 300,000 Euros. The 25,000 Euros difference will be paid by you to the seller in undeclared cash. Clearly, both you and he will have saved money by not being taxed at the correct amount.

Two ‘sale’ prices can certainly make life complicated. So, for example, both you and the seller may agree a sale price of 300,000 Euros for your desired Spanish property. However, you and your seller may not be able to come to an agreement as to the ‘black’ money element - and therefore the price to be ‘declared’ on the new Escritura. Your seller may, for example, want a ‘dangerous’ amount (say 100,000 Euros) of ‘black’ money. Wisely, you may refuse to pay this amount as its proportion with regard to a Spanish property with a fair market value of 300,000 Euros is very considerable. Without doubt, a discrepancy of a third could alert the tax authorities and result in a heavy subsequent fine – which you (not the seller) would have to pay!

Alternatively, you may refuse (rightly) to pay any ‘black’ money at all or simply be unable to do so because you have a high mortgage requirement. In the latter case, paying any ‘black’ money may be academic. Your mortgage provider, for example, will, obviously, only bring a cheque or banker’s draft for the seller at the signing of the Escritura. So, if your mortgage is very high then you may never have any cash with which to pay a seller in any event.

Of course, your seller is well within his rights to refuse to sell you his property - albeit that the only reason is his desire for a certain amount of ‘black’ money which you refuse to pay. Indeed, to your chagrin, you may find ‘your’ seller agrees with another buyer to reduce his ‘real’ sale price if that buyer offers him a really substantial amount of ‘black’ money!

In reality, the Spanish authorities and the ever tighter European regulations concerning money laundering are making ‘black’ money deals ever more difficult. Indeed, I would strongly advise you to avoid any ‘black’ money deal and make sure that the declared value on any Escritura is the ‘proper’ sale price.

Certainly, you should bear in mind that if ever you re-sell then your buyer may be someone who needs a large mortgage. If this is the case then he may be unable to pay you any ‘black’ money at all. In this case, you may have to agree to a declared value that represents the proper sale price of the property despite your Escritura value being artificially low. Obviously, you will then have to bear a potentially far greater Capital Gains Tax burden than ever you intended!

Finally, if a ‘black’ element to your purchase price is unavoidable then be extremely wary of paying too much. Crudely, within the Spanish property ‘industry’, 10% -15% of the ‘real’ purchase price is now considered (informally!) around the viable maximum to pay. However always, always try to avoid any ‘black’ deal regardless of the amount. It is dishonest, illegal, invariably troublesome, can lead to a very unwelcome fine and significant complications when you come to resell your Spanish property.1

Thursday 23 July 2009

THE SPANISH PROPERTY MARKET - BUY NOW OR WAIT?


Few things are more apt to cause stress than an attempt to ‘call’ a market. It is something that my friends at Currency Direct have to do daily and it is something for which I have nothing but admiration. They know that, one way or another, they have to make a prediction about what will happen in the future – and then act upon it - despite the real risks and difficulties of so doing.

When it comes to Spain, the vital ‘call’ for anyone interested in the country revolves around whether or not now is the right time to buy a Spanish property.

Certainly, as we all know, timing is everything. Buy at the wrong time and you can find that your new property in Spain instantly loses you money. On the other hand, if the market rises you may ‘kick’ yourself for not having taken advantage of a distressed Spanish property market offering possibly ‘once in a lifetime’ bargains. In short, do you buy now or remain watchful and wait for another year – or possibly much longer?

As always, it is hard to find meaningful guidance that will help you make an informed ‘call’.

Just as with the UK, reliable predictions in Spain about anything to do with the national economy and its related property market are hard to come by. Those that do exist are often coloured by political or vested interests so biased as to leave most observers baffled.

So, what is the reality?

Without doubt, Spain is suffering a property crash of epic proportions. The world economic crisis has hit the country very hard indeed but has been greatly exacerbated by the lunatic building programme of the past ten years. The latter resulted (between 20002 – 2007) in Spain building something like a third of all new properties constructed within the Eurozone. This was far in excess of any possible demand and has led to a massive oversupply. Indeed, it is thought (no-one knows exactly) that there are some 1 million new builds for sale and possibly much the same number of resales.

To make matters worse, new construction is somewhat like an oil tanker with building completions continuing to occur despite the brakes on the market having been applied some time ago. So, unfortunately, this year some 450,000 newly completed homes will evidently hit the marketplace - further damaging it when least needed.

The combined effect of the world recession, the collapse of the construction industry and reduced tourism means that Spain is already experiencing significant economic problems. Unemployment will almost certainly hit 20% this year (currently it is around 17%) and government debt may rise to 60%. The OECD is predicting an economic contraction of 4.2% and Standard and Poor (S&P) expect the Spanish property market not to recover until 2012.

But what does this all mean if you are a potential buyer? If there is to be no recovery until 2012 - do you have almost infinite time on your hands?

In a way. But what tends to happen in a property crash is that the weak tend to have to sell at whatever price within the first year or so of a crisis. Meanwhile, repossessions take around six months to a year to administer before they appear on the market as forced sales.

So, the first couple of years of a crisis are when you are likely to obtain the best priced quality properties for sale. After that time those property owners who have survived the worst effects of the storm tend to be able to hold onto their homes. The longer time passes the less likely they are to accept really low prices and the more determined they become not to sell at a loss. In reality, it is only at this time that a market naturally begins to stabalise.

My suspicion is that the Spanish property market may still dip down further between now and the early/mid spring of next year. However, during the same period, I think that a remarkable opportunity exists to buy some fantastic properties at genuine distress prices. The latter, for exceptional properties, may start to dry up towards the spring of next year thus making truly excellent buys increasingly hard to find. There may be a lot of ‘rubbish’ still remaining at low prices but they should be of no interest to the wise buyer (because something is cheap it does not automatically follow that it is a good buy).

Would I buy now? I think so - knowing that there will be a diminishing opportunity to buy exceptionally well.

However, I would be a tough and extremely cautious buyer looking for an absurdly good price on an objectively fine (fully legal) property that was easily resaleable and that I could pay for in cash (at whatever the relevant price range). I would also be someone who would be buying on the expectation that I would be unlikely to see any appreciable growth for another three to four years.1

Wednesday 22 July 2009

BUYING A SPANISH PROPERTY IN THE WRONG LOCATION – THE COST!


Stressing the importance of ‘location’ has become an unwelcome cliché. However, it cannot be stressed often enough - as it will define your future life absolutely. If you make a mistake with your choice of location within Spain then it may terminally harm your dreams of a new life and lead to a rapid and embarrassing retreat to the UK. Alternatively, if you decide to move again within Spain then it is bound to be an experience that is disruptive, unwelcome and expensive.

You should realise that any sale of a property in Spain, depending upon your personal classification, is likely to attract Capital Gains Tax at 18% even if you are selling your primary and main residence. Equally daunting is Spain’s 7% purchase tax payable when you buy a Spanish property. Move twice in succession (2 x 7% purchase taxes and a CGT of 18%) and you may lose a lot of money simply to the tax man! So, it is important to make sure that any purchase of property in Spain or relocation is precise and does not result in further unnecessary moves.

In fact, there are some very good general guidelines about what tends to suit the majority of people when they relocate. These are really important to understand and deserve close attention. So, always concentrate greatly more upon the suitability of your proposed location - than upon searching for particular properties in Spain. Finally, know what the guidelines are for a successful purchase of Spanish property. This is something that I will tackle in another blog and detail extensively in my book...1

LETTING YOUR SPANISH PROPERTY


The problem for you if you wish to let your Spanish property is that being properly registered can be an expensive process. If you are resident in Spain then you will have to become Spanish tax resident and register your letting business. This will involve inevitably the help of a lawyer (abogado) or tax consultant (asesor fiscal) and result in:
· A possible formal inspection of the premises to be let. This may mean that you have to expend money to ensure that your premises comply with all relevant Spanish Health and Safety requirements.
· Registration as a business. Most likely you will be advised to become autónomo (self-employed). This will mean that you will have to:
o Pay monthly social security contributions which may amount to at least 250 -300 Euros.
o Deliver proper invoices.
o Account for IVA (VAT) either monthly or quarterly
o Pay your lawyer or Spanish tax consultant’s fees.
o Obtain public liability insurance.

Note that in reality a properly registered rentals business in Spain is barely financially viable unless the net profit from the rental of your Spanish property exceeds some 350 + Euros a month.

Take care of renting your property illegally – the Spanish authorities will impose heavy sanctions upon you if they find out...1

SPANISH PROPERTY CLASSIFICATION - RURAL - A TERM OF VITAL IMPORTANCE


Rural land (also known as rústico or no urbanizable) encompasses most of the land in Spain and is essentially agricultural land. However, in property terms, it means that it is land in Spain that is severely restricted for building puposes. Unfortunately, this has been abused by the Spanish who have built many properties illegally on land classified as rural.

Existing Spanish properties located on rural land need to be treated with exceptional care. They may be legal, partly legal or completely illegal. Equally, at any time, they may be subject to a change of designation from rural to urbanizado.

Even if a Spanish property is legal and on rural land it can, by definition, potentially have serious future liabilities should the land be reclassified. This can happen anywhere but is most likely to occur in areas of high development potential such as those close to the coast or, perhaps, near to a booming town or village.

If an area of land in Spain is redesignated from rural to urbanizado then all the liabilities and benefits inherent in the redesignation of the land occur. This redesignation of land in Spain can be fantastically advantageous, make little real difference or be disastrous – depending upon the extent of your land, your finances, the cost and extent of the work and the actual execution of the infrastructure project.

Subject to obtaining the correct planning permission and abiding by strict regulations (such as the size of the property allowed) you can build a new property in Spain on rural land. However, this normally requires you to have a significant plot of agricultural land - although the regulations on this depend very greatly upon the given Spanish region (Comunidad). Equally, the law changes frequently which means that you must always check extremely carefully with a Spanish lawyer the precise regulations in force (in your particular region) before buying anything.

Currently, as an example (with various exceptions), you would need some 10,000 m2 of rural land in the Comunidad de Valencian before you could build a new property legally.1

SPANISH PROPERTY CLASSIFICATION - URBANIZADO - A VITAL TERM TO UNDERSTAND


To know what the term ‘urbanizado’ means is of vital importance to anyone thinking of buying land or property in Spain. Indeed, it is so fundamental - that you would be literally crazy to buy a Spanish property without fully understanding its significance...

‘Urbanizado’ is the term that describes land in Spain upon which it is legal to build - subject to obtaining planning permission and abiding by the relevant regulations. This land will normally (but not always) have a complete infrastructure of made up roads with pavements and street lighting, mains water supply, mains drainage, mains electricity and land line telephones (generally with an ADSL facility). Urbanizado areas are clearly designated on the plans held by town halls and their designation is ‘black or white’ – either an area of land in Spain is classified as urbanizado or not.

However, it is critically important to know that urbanizado areas are not always fully urbanizado (fully urbanised). This means that an urbanizado area may not have all of its proper infrastructure in place.

So, for example, an urbanizado area (particularly on some estates) may have electricity, mains water and some of the roads properly made up with street lighting and pavements. Any deficient elements of the infrastructure (such as, for example, where there are no pavements and street lighting) may at some stage be compulsorily rectified by the local authority. If this occurs then the owners of the Spanish property on the relevant part of the urbanizado estate (urbanización) will have to pay for completion of the remaining works i.e. the installation of mains drainage or the surfacing of the roads or the installation of proper pavements and street lighting.

Vitally, the safest property in Spain that you can buy is a Spanish property situated on land that is urbanizado and that is fully urbanised (urbanizado). If this is the case then you should face no further liabilities for infrastructure costs nor have any possibility of ‘land grab’. The signs that a property in Spain is urbanizado and also fully urbanizado (subject always to confirmation from your lawyer) are when the property has:
· Mains water.
· Mains electricity.
· Telephone land line.
· Mains drainage.
· A properly laid road.
· Pavements.
· Street lighting.

If your intended property in Spain lacks any of the above then it is highly unlikely that it is both urbanizado and fully urbanizado (with all the infrastructure works completed) – so be extremely wary of being assured otherwise!

Normally all cities, towns and villages are urbanizado as are some, but by no means all, housing estates (urbanizaciónes).1

SPANISH LAND LAW – IT IS NOT THE SAME AS THE UK!


The best advice that any Briton can be given, even before he thinks of buying property in Spain, is: ‘recognise, from the start that Spanish land law and its operation is very different from that of the UK’. This may seem an obvious assertion but many of the problems experienced by UK buyers in Spain stem from a mistaken belief that Spanish land law and building control is almost identical to that of the UK. It is not – anymore than it is in Poland, France or Morocco.

The UK has a very high standard of land law and any transgressions of illegality are penalised quickly. Certainly, if a property is built illegally, for example, then it is invariably promptly demolished by the local authority concerned. This is not the case with Spain. In fact, there are many properties throughout Spain that are either illegal, semi-legal or that have significant potential future liabilities.

Certainly, particularly in country areas you cannot presume that just because a building exists that it is fully legal or that it will not have significant potential future liabilities. In truth, you are better to think the reverse and then only buy after your conveyancing lawyer has provided conclusive proof to the contrary. If you do not follow this strategy then you may end up with the subsequent demolition of your Spanish property or the loss of some of your land and/or the requirement to pay considerable money to your local authority.

All of this is not to say that you cannot buy safely in Spain. You can. Millions of Spanish people and many expatriots own completely safe, secure, problem free properties - just as we do in the UK. However, unlike the UK, Spain can be unforgiving if you are careless or lack an understanding of how property matters operate.

As always, pre-warned is pre-armed and it is my aim to provide you with the knowledge to ensure that any move to Spain or purchase of Spanish property is done safely – for the long term.

In my next couple of Blogs I will tell you about the two most important classifications of land in Spain: urbanizado and rural. Knowing what they are is critical - and only once you understand their significance should you start looking for your dream property...1