What you need to know before getting a mortgage in Spain

In 2015 Javi and I bought land in his hometown, Sanlúcar de Barrameda, with a plan to build our dream home there one day. This year we’re ready to take the plunge! We’ve designed the house, chosen a builder, and secured a self build mortgage (hipoteca autopromotor). It’s an exciting (and slightly terrifying) time in our lives…once you embark on this journey there’s no going back!

One of the most complicated aspects of building our home (thus far) has been securing a mortgage with an acceptable interest rate. In the end of 2018 the Supreme Court of Spain ruled lenders (banks) must pay the AJD tax instead of homeowners. Since this ruling, banks have begun increasing interest rates to cover this extra cost. So what’s the going interest rate these days?

Current mortgage interest rates in Spain

Interest rates have significantly increased over the last few months. When we first started looking into mortgages in Spain (end of 2018) we saw 0.8% variable and 2.1% fixed for a 30 year mortgage. In January 2019, all the banks we spoke to had increased their rates to 2.6 – 3% fixed rate and 1 – 1.15% variable rate. AH! After lots of negotiating we were able to get a fixed rate of 2.3%. It doesn’t look like rates will be going down any time soon, but there’s chatter of an impending recession in 2020 so anyone’s guess is as good as mine.

Fixed vs. variable interest rates in Spain

As you consider your options you’ll notice banks pushing variable rates more than fixed rates. Right now, you can get an extremely low variable interest rate (I’m talking 1% low), but if you’ve signed a 30 year mortgage chances are that number will rise and you’ll be stuck paying for it. So why do people choose one option over the other?

• Variable Rates: Variable rates are a bit of a gamble. Right now rates are low but there’s no telling what they’ll be in 10 or 20 years. Before the economic crisis hit Spain people were paying upwards of 4 – 5% interest. If you choose this option make sure the bank does an annual rate review instead of bi-annual—if interest rates increase it won’t impact your payments as frequently.  
• Fixed Rates: Fixed interest rates do not fluctuate over time and you’ll know exactly what you’re expected to pay each month. The downside is fixed rates are usually higher than variable rates…but I don’t like surprises, especially when we’re talking about money.

How to pay less interest on your mortgage

My brother is a portfolio manager for a bank in the states so you could say he’s up to his eyeballs in loans all day every day. Javi and I had the option to choose a 25 year mortgage with a lower interest rate vs. a 30 year mortgage with a slightly higher rate. The 25 year mortgage meant having a higher monthly payment. My brother’s advice was to choose the mortgage option with the lowest monthly payment. Why? Because if you can pay extra towards the principal each month, you can reduce the years and total interest you end up paying.

• Principal (capital): The amount you borrowed (ex. you got a loan for €100,000).
• Interest (interés): The ‘fee’ you’re charged for borrowing money (ex. you got a fixed interest rate of 2.6%).
• Mortgage payment (quota): Your monthly mortgage payment (principal + interest)

Paying extra each month to reduce your principal faster means you will also reduce the amount of interest you pay over the course of the mortgage (and the time it takes you to pay it). Most Spanish banks provide online tools to calculate how much time or interest you can shave off of your mortgage over time using this method.

Getting a self build mortgage in Spain

Before getting a self build mortgage there are a couple of things you’ll need to sort out first (at least this was our case in the province of Cádiz).

• Building license (Licencia de obra)
• Land title (Parcela en propiedad)
• Approved project (Proyecto visado por el colegio de arquitectos)
• You’ll need to have 20% of the total project cost in cash/savings (aportación)

At this point you’re ready to apply for a mortgage. The bank will ask you for things like your employment contract, monthly salary payslips (nominas), proof the aportación in your other bank accounts, etc.

Quick tips I learned from this experience:

• Homeowners normally need to have 20% of the value of the project in cash. For example, your project is €300,000. You’ll need to have €60,000 saved up and you’ll be eligible for a loan up to €240,000.
• If you’re getting a self-build mortgage (hipoteca autopromotor) to build a house in Spain it’s common to only pay interest for the first 12 – 18 months until construction is complete. Once the project is finished you’ll start paying your monthly quota (principal + interest).
• Check to see if the mortgage has a prepayment penalty (comisión de amortización) if you’re planning to pay it off early. In Spain the penalty fees are usually low (ex. you’ll only pay 0.25% or 0.5%) and some mortgages have no penalty fee at all.
• As you consider mortgage options pay close attention to additional conditions of the mortgage (vinculaciones). For example, some banks require you to get life insurance, home insurance, security systems, etc. with them…these extra costs can add up so make sure you know exactly what you’re getting into!