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How Spain’s new mortgage laws could affect homeowners

Spain's new mortgage laws have come into effect. Here's what you need to know.

Published: 3 July 2019 08:43 CEST
How Spain's new mortgage laws could affect homeowners
Photo: AFP

After two years of waiting, Spain's new mortgage laws come into effect this month. These laws stem from an EU directive to align mortgage laws within EU member states and to improve the behavior of mortgage issuers.

In the past, Spain's mortgage laws were very favorable to banks and often punitive to borrowers. The new laws are very good news for homeowners and people wishing to purchase property in Spain.

Keep reading to learn the changes that will affect borrowers the most.

Longer default period before repossession


Photo: podsolnukh/Depositphotos

This is the best news for homeowners. In the past, Spanish mortgage laws allowed lenders to begin the repossession process if a borrower was three months late in their mortgage payments.

Moreover, the current three-month rule was a recent change. Following the 2008 financial crisis, lenders could repossess a home if a borrower missed only one monthly mortgage payment.

Spain's new mortgage laws state that:

  • In the first half of the mortgage term, lenders cannot repossess a property until the borrower is 12 months late in their mortgage payments, or the total amount of their arrears is more than 3 percent of the total capital loaned.
  • In the second half of the mortgage term, lenders cannot repossess a property until the borrower is 15 months late in their mortgage payments, or the total amount of their arrears is more than 7percent of the total capital loaned.
  • Late payment fees can be no more than 3 percent of the amount in arrears. Before the new mortgage laws, late payments fees were up to 12 percent.

More mortgage fees paid by the banks


Photo: photography33/Depositphotos

This is another game changer for borrowers. The fees associated with a Spanish mortgage are:

  • Fees paid to a gestor. Gestor fees generally amount to a few hundred euros.
  • Fees paid to the Notary.
  • Fees paid to the Land Registry. Fees paid to the Notary and Land Registry usually amount to around 10percent of the property value.
  • The AJD (Actos Juridicos Documentados), or mortgage tax. Depending upon the region in which you reside, the AJD can amount to up to 2.5 percent of the property value.
  • Property valuation fee. This typically amounts to 0.1 percent of the property value.
  • Mortgage origination fee. On average, this amounts to 1.5 percent of the property value.

In the past, ALL of the above costs were born by the borrower. Spain's new mortgage laws state that lenders must now pay all of the above fees, except for the property valuation fee and origination fee. So, banks have gone from paying none of the mortgage fees to paying the majority of the fees.

Lenders can no longer force borrowers to purchase other products

Spanish banks are geniuses at cross-selling. In the past, they required borrowers to purchase life insurance and home insurance before issuing a mortgage. Now, they must allow borrowers to accept insurance from external carriers. Moreover, they cannot threaten to raise the interest rate if the insurance is issued by a third party.

'Floor clauses' will be removed


 

Photo: aeydenphumi/Depositphotos


 

Prior to Spain's new mortgage laws, lenders put a floor on variable rate mortgages. Meaning if interest rates went up, they made more money but they were protected if interest rates fell. Now, the floor is 0 percent of the mortgage rate (not EURIBOR).

This provides additional protection for borrowers since a mortgage interest rate is always higher than EURIBOR. This is particularly relevant in the current environment, where EURIBOR is currently in negative territory.

Spain's new mortgage laws will allow borrowers to convert foreign currency denominated mortgages into euros

Bank clients with mortgages denominated in currencies other than the euro have the right to convert their mortgage to euros at any time. Additionally, banks must periodically inform their clients if their total debt is increased due to currency fluctuations.

If the above requirements are not honored by the bank the contract will be considered void. Interestingly, the borrower could demand that their mortgage is converted to euros retroactively and that all over payments in the other currency be deducted from the pending capital of the mortgage.

It will be cheaper for borrowers to repay their mortgages mid-term

Early repayment fees are cheaper and can only be assessed if the bank will incur a loss from early payment. Repayment fees ahave now reduced from 0.5 percent within five years of a variable rate mortgage to 0.25 percent within three years and 0.15 percent if repayment occurs within four to fve years of mortgage being taken out. There will be no fee if repayment occurs after five years.

Additionally, banks will no longer be able to delay the early repayment of a mortgage, which happened in the past. Spain's new mortgage laws stipulate that the maximum notification time a bank can demand is one month. After notification of intent to repay the mortgage, banks have three working days to assess the demand and provide the relevant information.

It will be cheaper to convert a floating rate mortgage to a fixed rate mortgage

Spain's new mortgage laws stipulate that banks can charge no more than 0.15percent to convert a mortgage from a floating to a fixed rate. These can only be assessed in the first three years of the mortgage. After that, the fee is 0percent. However, in this instance the borrower must pay the associated notary and Land Registry fees.

More protection for consumers

The new laws contain a number of other conditions to protect consumers. The primary ones are:

  • The standard mortgage offer document, called a FIPER, will be replaced with a FEIN. Much more detailed and transparent than the FIPER, it will allow borrowers to shop around for their mortages. If the mortgage is floating rate, the borrower will also receive a separate document outlining the potential effect of interest rate fluctuations.
  • A 10 day “cooling off” period. Borrowers must wait 10 days between receiving a FEIN and signing the loan documents.
  • Borrowers must take a small test at the notary to demonstrate they understand how the mortgage works.
  • The Banco de España will create a new agency to process mortgage related complaints and claims.
  • All commissions granted to lenders for issuing mortgages must be fully transparent.

Conclusion


Photo: AFP

Spain's new mortgage laws are a welcome addition. Not only will they protect consumers, they will also stimulate the housing market as currently, many Spaniards are terrified of taking out a mortgage and the fees involved. Additionally, the foreign currency conversion provision provides additional protection for expat borrowers.

 

This advice has been supplied by Moving2Madrid. If you are relocating to Madrid and want advice on buying contact Moving2Madrid to make an appointment for a free consultation.

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PROPERTY

Is it better for landlords in Spain to rent to temporary or long-term tenants?

If you own property in Spain that you don’t live in yourself, it’s likely that you’ll be renting it out, but is it best to rent it out on a temporary or long-term contract?

Published: 16 February 2024 11:14 CET
Is it better for landlords in Spain to rent to temporary or long-term tenants?

Your decision to rent out to temporary or long-term renters will of course be influenced by whether or not you intend to use your property yourself during parts of the year, but if not, it’s worth keeping in mind what the differences are. 

Besides the duration of the contract, the laws that govern each situation are different and the tax implications differ too.

READ ALSO: What are the requirements for landlords to rent out a property in Spain?

Long term contracts

Renting out long-term is governed under the Urban Leasing Law (LAU), which aims to provide shelter to families permanently and indefinitely.

It is possible to update the rent each year, depending on the price index or specific regulations at the time.

For example, in 2024, there is currently a three percent price cap. This means that you won’t be able to raise the rent on contracts that are already in force above three percent. The rental cap, however, does not apply to new contracts signed, or those signed after 2019.

Long-term contracts have a minimum duration of five years, however, your tenants can leave any time after six months as long as they give 30 days’ notice.

If you decide you need the property for yourself, you must wait until one year has elapsed on the contract and then give your tenants two months to vacate the property.   

If you decide to sell the property on the other hand, your tenant has the right to stay for up to three months or until the property is sold.

READ ALSO – Renting in Spain: When can a landlord legally kick out a tenant?

Temporary contracts

Regarding temporary rental, the law frames it under the label “rental for use other than housing”.

Temporary contracts must be for a minimum of 32 days, any shorter than this and they would be considered tourist rentals. Rentals to tourists are covered under a completely different set of rules and regulations and in many places require a tourist licence too.

READ ALSO: The rules for getting a tourist licence to rent out your Spanish property

Temporary contracts must also not be longer than 11 months. Beyond that time it would be considered a long-term rental and a long-term contract up to five years like above, would need to be issued.                                                                                                 

There is more flexibility when setting rents for temporary contracts. These are typically higher than long-term rents because of various factors, such as the addition of furniture, bills and wi-fi being included and the fact that they’re often rented out in high season. 

It’s worth keeping in mind that a high tenant turnover carries a slightly greater risk than when you rent your property out long-term. You or a management company will need to be more involved too.  

READ ALSO: Why you should consider renting out your property in Spain to students

It’s important to consider taxes when deciding to rent out to temporary or long-term renters. Photo: Andrea Piacquadio / Pexels

Declaring tax on rent from long-term contracts

You must pay taxes on your net income if you rent out long-term.  

This means adding up all the gross income for the year and deducting all the expenses involved with the rental. The following expenses are deductible:

– Waste collection fee
– Real Estate Tax (IBI)
– Insurance in case your tenants can’t pay the rent
– Home Insurance
– Community expenses
– Mortgage interest
– Real estate commissions

As the apartment serves as the tenants’ habitual residence, the tax authorities will also apply a 60 percent bonus on the net income before subjecting it to tax. This means the amount subject to personal income tax is only 40 percent of the net rental income.

These bonuses may be even higher if the conditions of the new Housing Law, introduced in 2023, are met.

Declaring tax on rent from temporary contracts

You must declare the income from all the temporary contracts that occur during the same fiscal year.

Expenses can be deducted just as before, but these may be different such as cleaning services between tenants and household bills, if they’re included.

You are also taxed on your net income, however, there are no bonuses applied like with long-term contacts as it is not considered to be the tenants’ main residence.

This means you will pay tax on 100 percent of the net income and not 40 percent like above.

You will also be charged tax on any time the apartment has been empty. This amount will depend on the cadastral value of the home and the number of days there hasn’t been anyone staying in it.

Declaring tax on rental income as a non-resident

If you’re a non-resident who owns a property in Spain and rents it out, the rules on taxes will be slightly different.

As a non-resident, you must pay income tax on rent earned in Spain as well as local property taxes such as waste tax and IBI.

If you rent your property out temporarily then you will need to submit quarterly tax returns, not just annual ones. You will also be charged tax for the periods when your property was empty. 

Those from the EU will be charged 19 percent, while everyone else will be charged 24 percent.

It’s very important to remember that if you’re from a non-EU country, such as the UK, the US or Canada you will not be allowed to deduct any expenses from your rental income, therefore you will pay tax on the full gross amount you earn.

To find out more, read our guide to non-resident tax in Spain.

Conclusion

The answer as to whether temporary or long-term contracts are best for landlords will completely depend on your situation and your preferences.

Long-term contracts are easier because you won’t have so much turnover and won’t have to be as involved. There are also various bonuses and tax breaks you can benefit from.

You can earn more from temporary contracts, but this means you will also pay more in taxes too and won’t get any bonuses. It will also take up more of your time, however, it’s a good option for those who want to use their property themselves for part of the year. 

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