Living in Spain - case study for buying property
Dreaming of that Villa in Spain?
After deciding on Murcia as the place where they would most like tobuy their holiday home and eventually retire to, Mr and Mrs Smith madea formal offer for a 3-bedroom villa which was formally accepted by thevendor.
Before having begun researching the property market in Spain theSmiths were wise enough to seek financial advice to help them work outhow much money they would be permitted to borrow and how much theycould realistically afford to borrow over a given mortgage term.
Their financial advisor discussed both the option of raising therequired funds in the U.K by taking out a mortgage on theirunencumbered U.K main residence and the alternative of arranging a Euromortgage through a Spanish lender which would be secured against theSpanish property.
Given that they were planning to rent out the Spanish propertyduring most of the year and would be receiving rent in Euros thefinancial advisor suggested that a Euro mortgage would suit them bestas they could use the Euros earned to contribute towards the mortgagepayments.
The financial advisor was careful to explain to them that by takinga Euro mortgage they were putting themselves at risk to currencyfluctuation volatility. This would be due to the fact that they wouldboth be earning the majority of their income in Sterling and would needto exchange this money into Euros in order to pay off their mortgage.The financial advisor recommended that they speak with a currencyspecialist who could help them minimise this risk by exchanging theirmoney smartly.
When it came to selecting a mortgage product Mr and Mrs Smith werehappy to see that there were a variety of different mortgages availableto them. The common maximum mortgage available was 80% of the purchaseprice or value (whichever the lower) and the maximum age that theeldest applicant has to be before the end of the mortgage term was 75although a very select few lenders would consider up to the age of 80.Their advisor explained to them that practically no Spanish lendersworked on the U.K model of income models, rather the more commonEuropean "affordability" approach. Typically the "affordability"calculation is as follows: The total of the Spanish mortgage payment,plus any existing worldwide borrowings the clients may have should notexceed 35% of their net monthly income.
Given that Mr and Mrs Smith were both 55 with Mr Smith employedfull-time earning £29,000 net after tax and Mrs Smith part-time earning£10,000 net after tax with no current mortgage or outgoings whatsoever,35% of their net monthly income would be £1,137.50 (£29,000 + £10,000 /0.35% / 12 months) They would therefore be permitted a mortgage wherebythe monthly repayment would not exceed £1,137.50. With such anallowance a typical Spanish mortgage lender would normally allow amaximum loan of around £155,000 or €195,300 at current exchange rates.
After deliberating over their mortgage options with their advisorthey decided that a Capital and Interest (Repayment) mortgage over 20years and arranged on a variable rate basis would best suit theirneeds. They decided against a fixed rate option as the variable rategave them flexibility to make over payments without any early repaymentpenalties. Knowing that they were likely to be permitted borrowings ofa maximum of £155,000 and that the maximum loan-to-value mortgage was80% they knew that they could set their sights at a property of£193,750.
Before deciding on how much to buy for they made sure that they hadat least 30% of the purchase price in savings to make up for depositand fees, duties and any charges that would arise. When buying aproperty in Spain and arranging the mortgage it is always recommendedthat you have at least 10% of the purchase price in savings to coverduties and costs associated with buying property. Given that they onlyhad £50,000 in savings they decided on buying for £155,000 (€195,300)and apply for a mortgage of 80% £122,450 (€154,287). For this theywould require deposit money of £31,000 (€39,060) and additional fundsof £15,500 (€19,530) to cover associated costs.
Their advisor applied for a Approval in Principle from a Spanishbank for a 20 year "Repayment" mortgage of £122,450 before illustratingtheir mortgage product in full. The lender approved a mortgage inprinciple subject to the clients undertaking a full-status check atapplication stage.
Mr and Mrs Smith signed the preliminary purchase contract for thevilla in Murcia safe in the knowledge that they had a Euro mortgagealready approved in principle.
Written by Matthew Weston
Blevins Franks International Ltd
Tel: +44 (0) 207-336-1012
Email: matthew.weston@blevinsfranks.com