Following the 2008 Global Financial Crisis the Spanish Property Market suffered a drastic decline, and in some instances, property values halved.
This article summarises the current circumstances and trends and the options available to those suffering Negative Equity.
We have observed an improvement in property price trends over the last 12 months. Whilst this is positive, it is key to remember the rises are small and of a small value. It will take a significant time period for prices to ever recover to the peaks of 2007. Accordingly, many investors still deem themselves ‘mortgage prisoners’, feeling trapped by the burden of Negative Equity and unable to free themselves of the property.
Another reoccurring issue of late is that 10-year interest only periods are coming to an end on many property loans. As we move towards the end of 2018, many people are seeing their mortgage payments convert to capital plus interest, causing significant rises in payments to Banks. Couple rising mortgage payments and associated costs, such as IBI tax and Community Fees, with the property value being lower than the mortgage balance; owners are feeling the strain.
Unfortunately, we keep reading forum posts from owners who have handed the keys back to the bank and walked away. Despite best intentions, this does not conclude their liability. In many instances the bank will proceed to sell the property at c70% of the open market value, leaving significant outstanding shortfall debt. Should the lender deem it necessary, they may seek legal judgement in Spain, putting your UK assets at risk through the European Enforcement Order.
Another common problem we see is borrowers who are in Negative Equity marketing their property at a price higher than the current market value in order to cover their mortgage. The main issue here is that any potential purchaser utilising finance will only be able to borrow on the current market value of the property, simply meaning a purchase cannot be achieved at the vendor’s desired price.
We recently met with a lender in Spain to discuss their current protocol in terms of non-performing loans. This eminent lender has confirmed their intention to clamp down on the 5,000+ non-performing loans on a purchased mortgage book, with all borrowers being from the UK and Ireland. They are instructing legal firms in the UK to place charging orders on UK assets for unpaid arrears, providing they have judgement in Spanish courts. This is having a significant effect on investors’ UK assets and equity held at home.
Despite many thousands of borrowers facing these issues, there are solutions available and it is important not to feel trapped.
An option open to +borrowers is the orderly disposal of the negative asset, be it through open market sales or voluntary surrender at the lender’s discretion, followed by lender write down, or in some instances, debt write-offs in full. At times it is possible to include Community Fees and IBI tax debts in these settlements.
Another option open to borrowers in Spain is to sell the property and pay the mortgage shortfall difference. This option is unattractive to most, given the expense of property sales, along with a significant payment to their lender being required. All other property associated debts must be cleared to allow this to complete.
As the market improves there is hope for some overseas owners in Spain, but a large proportion have fallen foul of the market decline. Many blame themselves, but frankly, no one could foresee the decline in the market and the impact it would have on so many. Loose lending practices by Banks at the peak of the market coupled with the following market decline has left many people in a trying situation, due to no fault of their own.
Far too many bury their heads in the sand without realising there is a way out.