Non resident Spanish loans for applicants outside Europe
Spanish Banks for many years have granted mortgages in Spain to most nationalities so technically UK residents should not be affected by the leave vote or find themselves precluded from making an application for a loan to buy a Spanish Property.
As the biggest buyers of second homes in Spain it is difficult to envisage a situation where Brits are barred from owning one as there is no other nationality that cannot within the scope of money laundering regulations purchase a property in Spain.
Who cannot get a mortgage in Spain
The non resident Spanish mortgage market currently is such that, only countries on the Bank of Spain watch list , which includes those countries where due diligence on affordability and for money laundering cannot be undertaken, find it impossible to get a Spanish mortgage, and the UK will certainly not fall into this category despite the referendum result.
Will Brexit affect a loan application in Spain
Where things may change is on the level of risk assessment and flexibility the Banks in Spain apply to a mortgage application from a UK applicant. Spanish Banks may also look to increase pricing to reflect the higher risk they feel they are taking in granting a loan to someone living with so many unknown quantities, although this is just speculation at present.
The reasons for the perceived higher risk on behalf of the Banks is twofold.
Legislation changes that will increase risk for Spanish Banks
Firstly as part of Europe, UK residents, whilst offering up the Spanish property as security, were also bound by EU legislation that meant if they chose to, banks could, pursue a court order made in Spain in the UK.
This meant in the event of a default situation the Banks in Spain had possible redress back in the applicants country of residency both in terms of the seizure of assets held there and court orders attached to earnings if a debt after repossession was outstanding.
Whilst, due to the high cost of pursuing residents in the UK, has generally prohibited the Banks from taking this level of action never the less the ability to do so remained.
Without a clear agreement about what legislation will or will not apply after the UK has left Europe the Banks will be likely to start applying a risk assessment that is akin to what they currently do when applicants from outside the EU apply now, and no legislation exists allowing the Spanish court order to be evoked in the borrowers country of origin.
Likely impact of added risk for UK applicants
The key impact on the terms and conditions for non EU residents is that gaining the full 70%, which is possible for EU based non fiscal resident of Spain, becomes more difficult. The immediate outcome of the vote may therefore be that the banks look to keep loan to values at 65% or below for all new applicants who hold a UK passport.
No lender at present had actually changed its terms and conditions as standard but anecdotally the risk teams in most bank are talking about being more cautious at this point in time until the total situation on future legislation becomes clearer.
At least two of the major Banks in Spain have meetings scheduled this week to discuss the situation.
One Bank has certainly already strongly indicated that an application would have to be vanilla and exceptionally strong for their normal 70% to be granted to a UK applicant going forward.
Economical risk considerations for Spanish Banks
The second key consideration for the Banks in Spain is that there is no clear view on what affect on the fiscal stability of the UK the vote will have. There is no way of knowing at this point whether the exit from Europe will have a long term positive or negative affect on the economy and if so to what level.
It is widely expected by the economical pundits and experts that unemployment will rise in the short term, that the UK may move back into recession or at the very least see growth stall. Whilst these are still very much predictions that are not proved, what is already very clear is that the Pound to Euro exchange rate will remain volatile for a sustained period in time.
Concerns over the future financial stability of applicants from the UK , in terms of work or company profits affecting employment and incomes, and the fact that any drop in the pound means the euro loan costs more are going to be taken into consideration from a risk perspective. These pressures will almost certainly have some impact on how underwriters view the application and the loan sizes and loan to value maximums.
All lenders in Spain when assessing a home loan work on affordability ratios. The lenders are looking to see, in general, that the amount of money going out each month on regular credit, both the new loan payments in Spain and the existing obligations in the applicants own country do not exceed around 35% of net incomes.
The lower the Pound the higher the debt to income ratio becomes as less income is being assessed when doing the affordability ratios on a euro calculation.
Due to volatility of the pound, those applicants right at the top end of affordability ratios, at the time of application, may experience some difficulty in getting the full finance they want. This is because the Bank will view that any further downward pressure on the pound will increase further the debt to income with no margin of flexibility, making a default much more likely.
Changes to terms and conditions
Once again as with the legal changes for risk assessment no Bank has as yet changed their standard practice and many use a low exchange rate already when assessing levels of incomes, but underwriting teams by nature are cautious and will always look on the worst case basis as this is their obligation when protecting the Bank.
Applicants who comfortably fit within current affordability parameters, based on the current exchange rate used by the lenders, should find nothing much changes but those on the edge of what the Bank deems acceptable will probably find any level of flexibility which the banks may historically applied will no longer be given.
Should a loan in Spain be considered during this period in time
For those cash buyers who are committed to owning a property in Spain, either by way of large deposit paid, or have bought off plan, or new buyers who were just going to pay cash a loan in Spain may be a good way of protecting their personal cash now against what is a very low sterling rate.
Sterling may recover as negotiations are under way and the outcome of the UK leaving Europe is clearer but in the immediate future the drop has increased the amount pounds needed to buy a Spanish property asset. A mortgage in Spain where the transfer of pound to sterling is a smaller monthly amount rather than one big lump upfront can minimize the impact.
Taking a short term loan in Spain does have its down sides as set up costs are relatively high and anyone who thinks they will pay off the loan, when and if sterling recovers should consider variable rather fixed rates due to the lower early repayment penalties.
Taking advice and tailoring the short to medium term needs to the closest possible solution for each individual mortgagee will be paramount going forward.
Buyers wanting to contract a loan in Spain will have to decide, out of the rather limited product options available in Spain, which will more closely match their view of the future and then will need to compromise accordingly.
Conclusion
In an environment of such uncertainty, all parties, both lenders and borrowers within the mortgage market in Spain will have to make choices about what to grant and what to take, and then hope that whatever way cookie crumbles the right decision was made. An active, all be it, possibly slightly restricted loan market, will however allow people to hedge their bets for the short to medium term.
The EU vote, in conclusion, will hinder the progress made in the last few years in terms of the Spanish non resident market for UK nationals but will certainly not halt it all together.