Fixed rate availability
In a marked wind of change Spanish Banks are promoting fixed rates.
For many years in Spain whether for resident or nonresident loans variable rates have been the favored choice of the Spanish Banks with over 95% of all Spanish mortgages completing each month on a variable tracker basis.
In the last few months whilst the completion statistics have not yet changed most Banks have launched a range for very attractive fixed rates. The product portfolios include short term fixes from 3 to 5 years reverting to variable after the fix expires known as mixed fixed rates and full term fixes.
By far the best value for money is on the full term fixed rates that can currently be achieved.
Full term fixed rates
Full term fixed rates mortgages in Spain, range from 10 years to 30 years although most banks cap their offering at 20 years. For those buying in Spain requiring finance fixed rates could provide good value for money.
Rates start from 2.45% for 10 years but it is also possible to gain rates from 2.55% for up to 20 years.
Why choose a fixed rate
It is hard to envisage an environment where rates stay at the very low levels we currently have across Europe for the full term of 20 year mortgage. In October 2015 the Euribor index for completions and reviews stands at 0.154% this is the lowest it has been since inception. With margins above Euribor for variable rates starting from 1.7% the fixed rates are still higher than underlying variable but not by much. Given that it is reasonable expectation that Euribor rates will rise in the next few years even a 1% increase starts to make the current fixed rate portfolios look good each way bets.
Given even as short a time ago as 6 months the best fixed rate offerings were touching 4% rates from anything between 3% to 3.5% for the long term are looking worthwhile considering.
Headline rates what to check
When assessing a fixed rate and headline rates to ensure they are the best buy it is important however to understand what linked products must be taken and how feasible for a non resident of Spain those linked products are. Caixa Bank for instance has a fixed rate for 20 years at 1.99%. To gain this rate a number of linked products must be taken and each product not taken increases the rate you pay. To avoid future cancellation of products taken at completion and affecting profit the Bank along with others writes into the mortgage in Spains deed what will happen to the rate if certain products are not maintained.
Caixa Bank require that to gain the full 1.99% a client contract a number of products which will be hard to meet for anyone not actually living in Spain. This includes having salary or asset and agreed amount of money above the loan payment paid into the Bank account in Spain, A pension plan of a minimum of € 1.000 per month and a deposit equal to or above € 25k. For each product not contracted up to 0.40% is added to the margin of 1.99%. Other linked products like direct debit levels on bank account, credit or debit card usage minimums, an alarm contract, life cover or car insurance for those over age 55 years, and buildings insurance are also linked to the rate.
If an applicant does not take any linked products with the lender the fixed rate comes in not at 1.99% but at 3.19%.
Each lender has a different set of linked products that must be contracted so when assessing best product for an applicant total requirements and total costs need to be taken into account not just headline rate.
The other consideration when looking at fixed rates as an alternative to variable rates in Spain is what happens in terms of early repayment penalties.
Early repayment penalties
For variable rate products the maximum early repayment penalty by Law is 0.50% for first 5 years followed by 0.25% thereafter. For partial overpayments most Banks will negotiate on this. For fixed rates products the overpayment penalties are normally much higher being up to another 3% on top of the normal penalty applied.
For some of the Banks this level is not set but is based on their loss at time of redemption this means any redemption penalty is a maximum so may in fact come in lower at redemption depending on the timing of the overpayment or total redemption of the loan and the cost of funds at that point. There is little certainty for any mortgagee as to what the final bill will be and a quote for the redemption fee would need to be gained from the Bank at the point of overpayment.
One lender will allow 25% of the capital to be overpaid each year without penalty but for all other lenders there is no capital exemption as you might get in the UK for instance where most lenders allow a 10% overpayment without any penalty fee.
Lowest early repayment penalties on fixed rates remains at the variable rate level for one Bank but given they have only just launched fixed rates it remains to be seen if they hold this. On average expect to pay an extra 1% for overpayment penalties in comparison to variable penalties with less room for negotiation with the Banks.
Mixed rate products only have higher redemption penalties during the fixed rate term so once the loan moves to a variable tracker normal redemption penalties apply. This type of product can therefore also be considered particularly for buyers of a property in Spain who think they will sell in the medium term.
Application process for fixed rate mortgage products
The process of applying for a fixed rate product can in itself hold some issues.
When making an application the client must specify if the loan is to be risked assessed against a fixed or variable rate. It is not possible as it is in other countries to secure the fixed rate during the application process by way of a small fee. The rate finally the Bank will offer is that they have available at offer of lending not at outset of application. This means applying for a fixed rate will have its uncertainties as you cannot be certain the rate you have applied for will in fact be available for offer.
On top of the uncertainty of what rate you may finally achieve if the rate offered is not suitable or has significantly changes to that applied for the whole application must be re-assessed by risk on a variable rate basis. This may include having to update documentation and will delay the application process. It is not possible without further risk assessment to just change to variable rate in the event the fixed rate is no longer preferred by the applicant.
Some of these irritations to the process may change if the banks in Spain continue to want to push fixed rates but will require updates to moist of the banks antiquated underwriting systems that do not allow for dynamic risk approval but follow cumbersome and old fashioned routes.
Benefits of taking a fixed rate in Spain
For all the quirks of the fixed rate application process new applicants should not ignore the benefits the fixed rates could bring over the longer term. Weighing up the cost of early redemption and possibly higher levels of linked products against certainty of rate in the longer term has now become a real reality for those considering a loan in Spain.
No-one has a crystal ball so whether the fixed rates on offer currently will prove in the medium to longer term to be more cost effective is difficult to say. Banks never give anything away so their view is probably that for the average life of a loan this being for non residents of Spain between 5 to 7 years they will not be out of pocket but Banks can be wrong and rates and cost of funds may go against them. The tangible benefit for the mortgage holder is a long term fix takes away the exposure and the risk of rates going through the roof and provides a determined and regular sum that must be found every month for the lifetime of the loan. Given a loan in Euros, if you earn income in another currency is already open to exchange rate fluctuations perhaps eliminating the second risk of rate changes so there is never a double whammy will help mortgage holders sleep easy at night.