Re-Mortgage Tips & Traps
News Article Date: Thursday 29th of October 2009
Mortgage lending in Spain is fundamentally regulated by the law of the February 1946 and the law of December 2007. In addition, various other regulations govern the rights of consumers and the independence of valuers.
Your application for a mortgage will be subject to “credit scoring”. This is an automated process carried out by independent credit reference agencies, such as Experian, who you may be familiar with from the UK or your other home country. If you are new to Spain you may be asked to provide a copy of your credit file from your home country.
The credit reference agency will allocate a numerical score to you based on such factors as the amounts you have already borrowed, how many applications for credit and searches have recently been carried out against you, whether you have always made your existing loan payments on time, and whether you have any judgments against you recorded in the central judgments registry in Madrid.
Contrary to popular belief it is not the Credit Reference Agencies who decide whether to grant you a mortgage. Each lender sets their own criteria: generally speaking the better the deal the stricter the criteria.
While you may want to shop around for credit be careful not to allow too many lenders to make searches within a short period of time as each new search can count against you and reduce your credit rating.
If your credit score seems unexpectedly bad you have the right to view your credit file and correct any errors. Links from such web sites as www.experian.es will take you through the process.
Mortgage rates from mainstream lenders are set by reference to a rate known as the “Euribor”. This is the Euro Interbank Offered Rate which is the average interest rates at which banks offer to lend funds to other banks in the euro wholesale money market. At the time of writing the Euribor rate is at a record low of 1% per year. There are many tempting offers of mortgages which are expressed as “Euribor plus X %”.
However, banks are in business to make a profit from lending and you should check carefully for how long the low initial rate will be maintained. Many new mortgages on offer only guarantee to maintain the low initial rate for a limited period. After this time the rate may be subject to a minimum which is much higher than the Euribor, no matter how low the Euribor may be.
There may also be a hefty charge to pay if you repay the new mortgage within a short time. This is to compensate the bank for the interest they will lose if you swiftly repay what is meant to be along term loan.
If you pass the credit score, the bank will arrange for your property to be valued. The valuation will be carried out by a qualified “tasador” or valuer in accordance with strict principles laid down by law. You will get a copy of the valuer’s report which may show a valuation which does not seem to bear any relation to the asking prices which you see in property advertisements for other homes in your neighbourhood. The valuer will compare your property with a number of actual property sales as recorded in the land registry. If in your area it is still common practice to under-declare sale prices this could depress the value of your property, and the amount a bank may be prepared to lend on it.
All being well, you will receive a formal mortgage offer or “oferta vinculante”, which you should study carefully before returning your signed acceptance to the bank. This will set out all the terms of the mortgage which will later be reproduced in the mortgage deed which you will be signing at the Notary.
When refinancing an existing mortgage with a new lender, by law the new lender must give your existing lender 15 days notice within which your existing lender has the opportunity to match your new mortgage offer.
Taking care when setting the date when you sign for a new mortgage at the Notary to refinance existing borrowing can also save you money. You should set the date for completion as close as possible to the day in the month when you pay your existing mortgage, otherwise you will be paying two sets of interest on the same money for a number of days in the month.
The cost of your new mortgage will be made up of the fees of your new lender for granting the mortgage, 1% documentation tax for the value of new mortgage, Notary Fees, the fees of the bank´s Gestoria for dealing with the administration of the transaction, and Land Registry fees. In addition, your previous lender will charge a fee for redeeming the previous mortgage which since 2007 should be 0.5% of the capital outstanding.
If you are not only refinancing existing borrowing but borrowing additional money, you may find two unwelcome consequences. The first is that that your costs may increase as you will require two mortgage deeds, one to “subrogate” the mortgage you are refinancing, and the other for the additional funds. You will therefore have to pay additional Notary, Land Registry, and Gestor’s fees. The second is that the bank may reduce the amount of the mortgage offer so as to provide them with an increased amount of equity in the property.
Not unnaturally, if you are borrowing additional funds you should expect the money to be in your bank account on the same day. There may actually be a time lag of up to a few days before the money is available to you.
Carefully managed, refinancing existing borrowing can yield substantial savings for borrowers with good credit but it is imperative to study the “small print” and if in doubt to take independent legal advice.
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