That was pretty much the headline of an article I wrote some months ago but, following my comments in the Property Post’s last edition, I thought I would expand upon the theme of ‘5 Reasons why you need a Spanish mortgage’ and introduce some new mortgage products that are here already or due for imminent release.
There are three generalised ‘needs’ that we at Rose FS identify in a good number of our clients;
1) To access some of the capital locked in their homes to be utilised a) to improve the property and b) to improve their lifestyle due to lack of income
2) To purchase a property (perhaps their first here in Spain) but without the normal ‘provable’ income that lenders need to see
3) To ensure the safety of their capital, probably mainly in their homes, and preserve such for themselves and their children in inheritance
I could generalise further and identify that the age of the average applicant is much older than we would have seen in the UK and certainly so for the first and last of the three classes I have mentioned above. For the second category, the age could range from 30 to 60 but also differ in that we see firstt time buyers with little capital or the inability to show earned income versus the far more sophisticated investor, probably with more than one property here already, looking to rely on ‘rental income’ rather than the traditional need for ‘earned income’.
The above all translates in turn to three basic mortgage product types to address these client driven ‘needs’. That are not so numbered to meet the areas I have raised individually; there is a certain overlap of benefit that suits more than one client type.
1) Long term ‘Interest Only’ mortgages. I stress long term because we have a range of shorter terms (2 to 10 years) that suit most eventualities. So that being so, why do I need anything longer?
There are numerous needs and benefits that can be overcome by such a product:
o Where capital, normally £, where income that can be generated from investing that can easily exceed the Euro interest payable on the mortgage. In other words, after paying the debt service, an added benefit.
o Where the intent at the outset is to make a capital gain i.e. to sell the property in the future. This does not relate to the client who is retiring here and normally suits the mentality of the property investor. Having said I will now contradict myself and say that the ‘retiree’ should consider using long term ‘interest only’ for the following reason.
o Inheritance Tax (IHT). Not to be taken lightly. To not only take a mortgage where possible, even though capital may exist to wipe out the necessity. By having a mortgage, the free equity in the property is reduced which can, in turn, eliminate any exposure to IHT which, here in Spain, applies at much, much lower levels than in the UK. Many property purchasers are simply unaware of their exposure here which can mitigated so, so easily and the use of a long term ‘interest only’ mortgage is one route.
At Rose FS, we are keen to push lenders to address our clients’ requirements, and I am pleased to say that, not only do we have a product that can offer up to 25 years ‘interest only’ but other lenders are working with us to try to come up with their own solutions. I suspect that in a relatively short time, we will see a ‘sea change’ against what we have now versus a whole new capability to deliver a full solution which is not restricted to any degree. Read that as months and not years.
2) Equity Release mortgages. Now I have to e careful here and explain that I do not necessarily refer to the more sophisticated mortgage/investment back-to-back arrangements that are on offer. These are attractive to some clients in that they can achieve the desired end of mitigating IHT and even provide a ‘free’ income over and above paying the mortgage debt service, but great caution is needed in understanding the product. They can work well but they are not the be all and end all to all clients.
The term ‘equity release’ covers the general need to do just that, release some of the equity in the home. In the UK, the ability to achieve this for the elderly, with limited income or other capital on which to live, gave rise to a product that needed no provable income and where interest payable on the borrowing was ‘rolled up’ and added to the mortgage debt. Ideal for certain clients where capital is needed.and where there is no real ability to pay a debt service monthly i.e. low income probably pension orientated. These have been re-categorised by the FSA, the regulator in the UK, as ‘Lifetime mortgages’.
Now the equivalent of this product, where no proof of income needs to be seen by the lender, does not exist here in Spain except in the form of the IHT mitigation ‘equity release’ schemes that I mentioned above. No. I refer to a product that does not involve the mandatory investment of the capital to meet any debt service, where the capital can be taken in the form of a mortgage and debt service is either rolled up or deferred, probably for the eventual beneficiaries under a Will to take on.
These products are on the planning table and I would hope to be able to have these available in a few months only.
3) Self Certification of income. That simply means there is no need to prove an income as lenders normally would require. The lenders in the UK are experts at assessing risk by categorising market ‘niches’ and self certification products were developed years ago to meet client needs. They, the lenders, effectively take a gamble that clients will not default and the risk can be controlled by limiting the percentage of the property value they lend against an expected rising property market. The product has been largely responsible for the formidable property price rises over the last 10 years or so.
Now, again, no ‘real’ self certification product exists here. Some would have you believe otherwise but generally lenders will take a view cases by case. If a client only wants to borrow 30% of the property value, the risk to the lender is clearly that much lower than a client that wants to borrow 80%. But lenders are not in the business of repossessing property to get their money back! They lend simply to make a turn on the interest, so they need to be sure that the secondary risk i.e. the percentage of the value they lend, is assured.
But, if these ‘self cert’ products as call them do not yet exist, is there a way around the problem and the inability to prove income? The answer is yes!
Many elderly clients retire to Spain capital rich and income poor. And, when wanting to borrow money for whatever purpose, the age and income can be a limiter in the eyes of a lender. This is because ‘affordability’ is calculated using a normal Repayment (capital and interest) mortgage rather than ‘interest only’. So, to overcome the problem, we use brothers, sisters, kids or even parents who do have provable income to act as a ‘guarantor’. Normally it is the children that act in this capacity and, frankly, if they want the benefit of the inheritance when the parents pass on, I personally do not think this is a lot to ask! At the end of the day, with the parents (the main applicants) only having to pay ‘interest only’ the chance of the guarantors being called upon is remote to say the least.
But there is often the matter of pride and the reluctance to call upon anyone to stand on the shoulder of the applicant in financial support. So then we need a ‘pure’ self certification mortgage to fill this niche in the market. Watch this space!
Mark Mountney is a partner in Rose Financial Services, a specialist mortgage brokerage based in the Parque Comercial, Mojacar. He is a fully qualified mortgage and financial adviser in the UK with some 10 years experience in managing his own firm. Mark was also a founder of The Association of Mortgage Advisors, the trade association for mortgage intermediaries with 13,000 members.