The changing face of non resident lending in Spain.


Spanish lending whats new

Last week saw the launch of Hola Bank a division of Caixa bank set up to meet the needs of overseas clients.

Branches in the Spanish coastal areas and Barcelona have been selected to be rebranded as Hola.

The mission of the new network is to capture 25% of the nonresident mortgage market and become the bank of choice for expats and overseas owners.

All branches will have multilingual staff and each Branch and Region will have a mandate for Spanish mortgages up to a certain level,  giving more flexibility to the branch network to efficiently move loan applications through, and a higher level of understanding of nonresident requirements and expectations on service levels.

This initiative is one of many now underway in the Spanish Banking system as the Banks struggle to reverse the trend of shrinking mortgage books which has had a knock on affect on earnings.

Non Resident applicants

Nonresident applicants who in the last few years have been seen as the scourge of the Spanish mortgage market are now back as flavor of the month.

Whilst it was true in the early days of the crisis investors who had achieved, by linking to valuation, the full purchase price or more on a loan, defaulted in their droves. Whilst this heightened the caution of the Banks to non resident buyers these were in fact a small minority of the overall nonresident market.

It was, and is clear, that when a purchase is a second home and you have no embedded interest in it by way of your own cash it is easy to walk away when the price of property becomes less than the value. This is exactly what happened when the property bubble burst  in Spain . Unlike second home owners residents trying to hang onto their homes were less likely to give up trying to pay the mortgage easily so it appeared on the surface that overseas owners were fickle with a high propensity of nonpayment.

As time has gone by it has become clear to the Banks in Spain that in general nonresident mortgages perform better than the resident loans. Other countries have recovered from the economic crisis quicker than Spain allowing most overseas borrowers to make the mortgage payments for their property in Spain.

The raft of borrowers who managed to secure from the Banks, either 100% loans, or in some cases more and never had any intention of holding onto the property if times got tough have all disappeared. The owners left are the ones who bought for the right reasons, put in reasonable levels of their own money and had every intention to pay their mortgage and holding onto their holiday home.

The issue was the Banks not the bulk of the borrowers.

The lessons to be learned

Linking to valuation was the first mistake especially in a rising market. Allowing borrowers to borrow more than the purchase price was always going to backfire on the lenders. Lack of understanding about overseas documentation was another key issue for the banks. Many a bank accepted readily a fraudulent application because it was made up of tidy 3 months pay slips and a P60 produced on a computer and rejected more complex but perfectly kosher applications from other applicants.

Failure to check both the applicants and the quality of the introducer meant that applications that should never have been approved and were clearly not correct slipped through the net.

With all this in the past and a much better understanding of nonresident documentation and tighter controls going forward nonresident borrowers are seen to provide the banks with quality applications. With loan to values now linked to valuation or purchase price whichever is the lower and maximum loan to values at 70% meaning large amounts of personal cash are in embedded in the property default ratios for non residents are very low.

In recognition of the profitable business a holiday home buyer in Spain can bring Banks are finally responding positively and locking to gain their fair share of this market.

Key non resident lenders

Sabadell Bank is focused on the overseas market and has remained relatively active in this arena through the past few years. Having gained last year a good percentage of the international buyers by having higher loan to values and keen pricing on their premier product Sabadell made the mistake of increasing margins in January. This decision was taken at a time when other Banks who had not been so active started to look more specifically at the market and lowered margins. Timing was completely wrong and in a recognition of this after an couple of months of reduced volumes Sabadell have responded by dropping margins again, reducing redemption penalties on their fixed rate product and giving some flexibility on pricing back to the Branch network.

Bankinter another large and active player is also providing more flexibility on pricing and terms and conditions to its branch network who are under orders not to lose any cases to pricing. Previously stuck hard and fast on a maximum of 60% loan to value for higher loan sizes Bankinter can now consider an application up to 70%.

UCI the lending arm of Santander and BNP Paribas have launched very competitive fixed rates and a good variable rate product and unlike others does not require life cover is contracted with them.

2015 and beyond

With more and more banks looking to grab the growing numbers of nonresident borrower’s competition should remain fierce.

We are not going to see a gung ho approach to risk assessment and history has told the Banks that certain types of profile are more likely to default and this will always cause issues for those who fall within this type of profile, but the market is more open.

Pricing will be set at a level that allows the Banks to make money and mortgage products in isolation at margins of less than 1.5% do not meet this requirement but the days of margins at 4% plus are now over.

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