Spanish Mortgages: Fixed or Variable?

Interview with Anne Bayne, director of realestate-dreams

How do the low interest rates we see today translate to the Spanish property market?

The low interest rates are having an overall positive effect, but the immediate recovery of prices and demand is much greater in popular locations within Spain, like in the bigger cities and the beach areas, than in the outskirts.

Anne Bayne

Anne Bayne

Do you recommend a fixed or a variable interest rate?

In most cases, a mortgage with a fixed interest rate is best. A mortgage with a variable interest rate is convenient at first sight because the Euribor, the European leading interest rate, is below zero. Variable mortgages are calculated using the Euribor to set a rate for each individual client. The Euribor, however will probably rise in the next 2-3 years to 2%, or possibly even higher after that. So a variable-rate mortgage could become much more expensive by that time.

In contrast, a mortgage with a fixed interest rate is established for 20, 25, or 30 years and therefore offers much more security for personal planning. Moreover, rates for this kind of mortgage are as low as ever. Professor of Economics Gonzalo Bernardos gives the example that if you get a mortgage for 2.5% today and the inflation rate in 2020 is 2.5%, your effective cost is 0%, and so your loan is essentially for free. This is a realistic assessment and not wild speculation, making this kind a mortgage a good opportunity.

Until last September, only 19.2% of mortgages were fixed-rate. Why are so few mortgages fixed-rate? (Source INE)

Until recently, fixed-rate mortgages were not very well known in Spain and they have historically been less attractive because of high fixed interest rates. Spanish banks just began actively promoting these mortgages in the last few years. First by smaller institutions which tend to have more flexible price policies, and now also by the big banks. Many consumers just don’t know much about these mortgages and are not receiving good advice when they buy. From the bank’s perspective, variable interest rates are, of course, more attractive over the long term.

Most buyers purchase a property only once in their life, and despite the enormously high expense, they are not seeking independent advice regarding the best financing for them. And, of course, a mortgage with a variable interest rate looks better in the short term and therefore it can seem more attractive at first sight.

Are there also disadvantages to a mortgage with a fixed interest rate?

Yes, definitely. If you know, for example, that you will pay off your mortgage in a few years, then you will probably be better off with a variable rate mortgage. Furthermore, consumers that signed a “collar clause” (a “clausula suelo”) should pay attention now. The Supreme Court of Spain declared these clauses illegal in 2013. Since then, banks have been trying to convert the mortgages of affected clients into mortgages with fixed interest rates. This can be disadvantageous depending on the term left on the mortgage.

What should I know when applying for a mortgage in Spain as a non-resident?

Two things are critical: you can speak directly to the bank or you can use a mortgage broker.

We can put you in touch with different banks and brokers who speak English. The advantage of a broker is that he or she can often negotiate better terms with the bank. The broker does get a one-time fee when signing, but she can save you a lot of money in the long run if she can successfully negotiate favorable payback terms. It is also possible to have a mortgage directly with the bank. We recommend that you get at least 2-3 offers to compare.

Which documents are necessary to get an offer?

It’s generally good to have all the necessary documents prepared in advance to avoid losing time in the purchase process and to have quick access to reliable numbers. Employees need their last three pay stubs, their last tax declaration, their identity card or passport, their NIE number, and a letter from their company to confirm employment details such as the job description, duration, and annual salary.

Freelancers and independent contractors need their income tax declaration and annual account from the last two years.

Everyone should also gather a list of other income sources and accompanying proof, along with credit reports, bank statements for the last six months, and documentation for their current main residence such as a rental contract or mortgage receipt. The specifics on some of these documents can vary depending on your home country.

How do you think the Spanish mortgage market will evolve over the next five years?

I think Spain’s property market will continue to grow and its mortgage market will continue to grow and evolve along with it. There is currently a good foundation and prices have been revised and processes have been improved. Furthermore, agencies are more regulated now, especially here in Catalonia. I see the Euribor rising gradually over the next few years, but I doubt we will see dramatic changes over the next five years.