How to finance an overseas property in Spain

Spain's diverse landscapes, rich cultural heritage, and favourable climate make it an appealing destination for property investment. However, securing financing for a property in Spain, particularly as a non-resident, involves specific complexities. Next, we are going to analyse various financing options, such as mortgages, home equity loans, and alternative strategies, to help you successfully finance your property purchase in Spain.

Understanding the basics: overseas property financing

Financing a property abroad differs from purchasing a home in your own country. Elements such as currency exchange rates, legal requirements, and available financing options can significantly impact the buying process. Understanding these factors is essential before proceeding with your purchase.

There are several financing options to consider. Mortgages are a common choice for many buyers, with various Spanish banks offering loans to non-residents. Typically, lenders will finance up to 70% of the property’s value, with the remaining amount needing to be covered by the buyer's personal funds. Interest rates and terms can vary, so it's crucial to compare offers and consider the long-term costs associated with each option.

Alternatively, some buyers may opt for equity loans or paying cash outright. An equity loan allows you to leverage the value of a property you already own, either in your home country or elsewhere, to fund your new purchase in Spain. Paying cash is a straightforward option for those who have sufficient funds, enabling a quicker buying process and often giving you more negotiating power with sellers. Developer financing is another option to explore, especially if purchasing a new-build property. Some developers in Spain offer payment plans, which can reduce the need for traditional financing.

In the following, we will consider these options in detail.

Mortgages for non-residents in Spain

One of the most common ways to finance an overseas property in Spain is through a mortgage. Spanish banks offer mortgage products tailored to non-residents, but the terms and conditions may differ from those available to residents. Below are the key aspects you should consider when applying for a non-resident mortgage.

Key mortgage terms for non-residents

Spanish banks typically provide the following terms for non-residents seeking a mortgage:

• Loan-to-Value (LTV) Ratio: Non-residents can usually borrow up to 60%-70% of the property’s value, meaning you'll need a deposit of 30%-40%.
• Interest Rates: Interest rates for non-residents are generally higher due to increased risk. You can choose between fixed or variable interest rates, which may significantly affect the overall cost of the mortgage. Variable rates are often tied to the Euribor.

Eligibility requirements

To obtain a mortgage as a non-resident, you must meet several criteria:

• Good Credit History: Spanish banks will assess your credit history, so it's crucial to have a solid credit rating in your home country.
• Income Verification: You will need to provide proof of sufficient income, including documentation such as salary slips, tax returns, and bank statements.
• Spanish Bank Account: Mortgage payments are generally made from a local Spanish bank account, which you must open prior to securing the loan.

Currency considerations

Because the property is priced in euros, exchange rate fluctuations between your home currency and the euro can affect your mortgage payments. Here are two strategies to manage this risk:

• Mortgage in Euros: Securing a mortgage in euros aligns your loan with the property's currency reducing exchange rate risk.
• Managing Dual Mortgages: An alternative is to take out two mortgages—one in your home country and one in Spain—though this can increase complexity and exposure to exchange rate volatility.

Leveraging your existing property with home equity loans

If you own property in your home country, a home equity loan could be a viable option to finance your purchase in Spain. This type of loan allows you to borrow against the equity built up in your current property.

Releasing equity from your home

Releasing equity involves taking out a loan secured against the value of your existing property. This can be particularly appealing if you have significant equity and can secure a low-interest rate loan. The funds can then be used as a deposit or to pay for the entire property in Spain.

However, it’s essential to verify with your lender whether a home equity loan can be used for international property purchases, as not all financial institutions allow this. Additionally, consider the implications for taxation and currency exchange.

Risks of home equity loans

There are risks associated with home equity loans. Failure to keep up with payments could put your primary residence at risk. Additionally, fluctuations in the property market could affect your home’s value, potentially leading to negative equity.

Another risk to consider is the impact of rising interest rates. If you have a variable-rate loan, your monthly repayments could increase unexpectedly, putting additional strain on your finances. Furthermore, if the housing market in your home country declines, the value of the property securing your loan may decrease, making it harder to refinance or sell without incurring a loss. Currency exchange rate fluctuations also pose a risk for international buyers, as changes in rates could increase the cost of your repayments if your income or assets are in a different currency from the loan.

Paying cash: a direct but capital-intensive option

If you have substantial savings, paying cash for your property in Spain can be a straightforward option. This approach eliminates the need for dealing with banks and mortgages, streamlining the buying process. However, like all strategies, paying cash has its advantages and disadvantages.

Advantages of paying cash

• Speed and negotiation power: Paying in cash can expedite the purchase process and often gives buyers more negotiating power. Sellers may favour cash buyers because the transaction is faster and more certain, potentially leading to a better price.

Disadvantages of paying cash

• Tied-up capital: One of the main downsides of paying cash is that it ties up a large amount of capital, reducing your liquidity. This could limit your financial flexibility for other investments or expenses.
• No mortgage tax benefits: When paying in cash, you won't benefit from potential tax deductions related to mortgage interest, which might be an important consideration depending on your financial situation.

Developer financing: an alternative to traditional mortgages

In some cases, property developers in Spain offer financing options directly to buyers, particularly for new developments. This financing usually involves staged payments aligned with the construction process and can be an attractive alternative for some buyers. However, it's important to understand how it works and the potential risks involved.

Developer financing typically requires an initial payment when signing the contract, followed by several staged payments throughout the construction phase, with the final payment due upon completion. While convenient, the interest rates offered by developers may be higher than those provided by banks, and penalties for late payments can apply.

Before committing, it's essential to ensure that the developer is reputable. Payments should be protected through a bank guarantee, which is a legal requirement in Spain to safeguard your investment if the project is delayed or fails to complete. It's advisable to thoroughly review all terms and conditions and seek legal advice to mitigate potential risks, such as delays or financial difficulties faced by the developer.

Using retirement accounts for overseas property purchases

For buyers from various countries, retirement accounts can sometimes be used to purchase property abroad, including in Spain. UK citizens might explore the option of using a Self-Invested Personal Pension (SIPP), while U.S. citizens can consider a Self-Directed IRA (SDIRA) for property investments. However, careful financial planning and legal compliance are essential to making this strategy work.

When using retirement accounts for overseas property purchases, effective financial planning is crucial. This includes understanding tax implications, managing currency risks, and ensuring the investment aligns with your long-term retirement goals. A financial planner with experience in cross-border investments can help navigate these complexities and optimize the benefits of using your retirement accounts.

Additionally, it’s important to follow the legal guidelines and restrictions associated with these accounts. For instance, UK investors using SIPPs must adhere to strict rules, typically limiting purchases to commercial properties with specific tax benefits. U.S. citizens must ensure that all property-related expenses and income are handled within the SDIRA to maintain its tax-advantaged status. Consulting with a professional experienced in international finance can help you stay compliant and avoid costly mistakes.

Managing exchange rate risks

Currency exchange rates play a crucial role when buying property abroad. The exchange rate between your home currency and the euro can affect the overall cost of the property and your mortgage payments.

To mitigate currency risks, consider the following strategies:

• Forward contracts: Lock in a specific exchange rate for a future date, providing certainty over the amount you will pay in your home currency.

• Foreign currency accounts: Some banks offer foreign currency accounts, allowing you to hold funds in euros, which can be useful for making regular payments, such as mortgage instalments in Spain.

• Dual currency mortgages: Securing a mortgage in Spain in euros can help match your liabilities with the property’s currency, reducing currency risk.

Working with a currency exchange specialist can help manage fluctuations. Regularly monitoring exchange rates and planning your transfers strategically can save significant amounts over the course of a property purchase.

Practical tips for non-residents buying property in Spain

There are several key steps and considerations to keep in mind to ensure a smooth process when buying property in Spain. From opening a local bank account to understanding the associated costs and taxes, careful planning is essential. Below, we explore important aspects such as banking, fees, working with agents, and understanding local laws that are crucial to your property purchase.

Opening a Spanish bank account

Before finalizing your property purchase, you will need to open a bank account in Spain. This will be used for mortgage payments, utility bills, and other property-related expenses. To open a bank account as a non-resident, you will typically need a valid passport, proof of address in your home country, and a Spanish tax identification number (NIE).

Understanding the costs involved

In addition to the property price, several additional costs are associated with buying property in Spain, including:

• Notary fees: Typically, 0.5% to 1% of the property price.

• Land registry fees: Usually 1% to 2% of the property price.

• Property transfer tax: Varies by region but is generally between 6% and 10% of the purchase price for resale properties. For new builds, VAT (IVA) of 10% applies.

• Stamp duty (AJD - Actos Jurídicos Documentados): Typically ranges from 0.5% to 1.5% of the property value, depending on the region.

• Legal fees: It is advisable to hire a local solicitor to assist with the purchase. Legal fees typically range from 1% to 2% of the property price.

For a more in-depth discussion of the costs involved in purchasing property in Spain, you can refer to our guide on what taxes and expenses you will pay on the purchase of a property in Spain.

Working with a real estate agent

A local real estate agent can be invaluable in navigating the Spanish property market. They can provide insights into the best locations, negotiate on your behalf, and assist with the legal aspects of the purchase. Ensure the agent is registered and reputable, as the real estate industry in Spain is less regulated than in some other countries.

Understanding local property laws and taxes

In addition to financing and purchase costs, it's important to understand the local property laws and tax implications. Spain has specific regulations regarding property ownership, inheritance, and taxation that can vary significantly from those in your home country. For example, capital gains tax may apply when selling a property, and wealth tax might be applicable for high-value properties.

Buying property in Spain presents a valuable opportunity, but it requires careful financial planning. Whether you choose to finance your purchase through a Spanish mortgage, release equity from your current home, or pay in cash, understanding the available options and their financial implications is essential. With a well-considered financing strategy and the right professional advice, you can make a sound investment in Spanish real estate, taking full advantage of what this country has to offer.