The year so far
As 2016 draws to a close the Spanish Banks will be looking at a year of missed targets.
Whilst none of the Banks will have reached the new loan levels they were looking at for the beginning of the year this has not relaxed criteria or seen competition rising to get in the last minute loans.
Residential credit in Spain has continued to decrease as more loans redeem than are added and a diminishing mortgage book has been the name of the game for a number of years now. Spanish Banks had hoped to reverse this trend so to bring in new performing loans for a number of reasons.
Firstly new performing loans adding to the mortgage book bring down non performing loans as a percentage of the entire lending book.
Compulsory add on products
Secondly the add on products so important to earnings like, insurances, bank accounts etc would also increase. This is particularly so because existing loans set up during the boom times rarely had add on products written into the deeds so apart from a bank account many older loans remain much less profitable.
These factors aside the Banks in Spain have come under a number of other pressures during the year. The Bank of Spain shot a warning across their bows about offering rates that left them on the edge of profitability keeping rates at reasonable levels but not allowing for a cut throat market.
The regulator has sought to keep lending under some control.
Impact of Brexit
Brexit has damaged the UK non resident market both in terms of the banks nervousness surrounding the fiscal strength of UK buyers going forward and the fall back of UK buyers as they wait to assess the situation.
The success of Donald Trump is having an affect on the financial markets and has put up the cost of borrowings. This is having an affect on the cost of funds for all banks in Spain as well as other countries like the UK.
A few weeks ago for instance Bankinter dropped their fixed rates, this was prior to the American election result. Within 6 weeks they had put them up again and also added an extra half a percent to the rates for non resident borrowers.
We can expect this trend to continue until at least the dust settles and the market find some stability.
Approach to Risk
Whilst non performing loans have dropped considerably in the last 12 months the Banks remain cautious when underwriting. Loan to values have not increased and are unlikely to do so. Whilst some lenders are back to 70% for the non resident mortgages in Spain many have held fast at 60% and unless the application is pretty vanilla 70% remains difficult for many applicants.
We have seen an upturn in the application for loans from a number of other countries. America, far east and Scandanavian markets have risen in 2016.
Irish applicants once nearly as prolific in mortgage applications as the British have started to drift back into the market as the economy in Ireland stabilizes.
Foreign exchange considerations
Currency fluctuations remain a concern of many who do not earn their income in Euros. The pound to Euro has been as high as over 1.40 to the euro and as low as 1.10 within a 3 month period.
This can make a massive difference to the price being paid particularly if the decision to buy was made at 140 and the completion at 1.10. Taking a mortgage in Spain where the funds are in Euros can help mitigate this ongoing issue as can getting a forward fixed rate from an FX provider. In volatile times sometimes certainty at a lower rate than that prevailing is better than risking a drop between offer to completion.
The rise of fixed rates in Spain
Fixed rates have been the big mortgage product type change in the Spanish mortgage market for 2016. From less than 5% completing on this basis a couple of years ago now more than 20% regularly form part of all new loans constituted each month.
From having no fixed rates and where they were available these only being on a month by month basis all Banks now have a range of fixed rates for the full term. Instead of changing these each month, market conditions aside, the fixed rate levels run for a good period in time allowing a mortgage application to complete on the rate applied for rather than waiting to see what was actually available at point of offer rather than application.
Despite the recent rise in cost of funds it is still possible to get 10 year fixes from 1.9% and 20 year fixes from 2.5%.
Early redemption penalties once also a problem on fixed rate products have dropped in general from 4% or so to around 1.5% with some lenders offering terms even lower than this.
2017 what next for Mortgages in Spain
2017 will possibly start a bit slow as article 50 is invoked or not ! the lenders will remain nervous and this will hold back their desire to start adding to their depleted mortgage books. Germany and France with elections due will have an impact as everyone waits to see what surprises these might bring.
Second half of 2017 may see more movement as the Europe and North America economies and fiscal performance become clearer and hopefully more stability.