Remortgaging and refinancing in Spain

After a long absence for the long weekend here in Spain, I'm back. I'm collecting some numbers for bank mortgages as promised - meanwhile, the Irish vote has taken place so let's look at any effects on mortgage payers.

The Irish have had an overwhelming turnout, in effect sending a message that the bailout of the Irish banks is not acceptable as it happened. Of course, a flurry of politicinas have come out to do damage limitation as usual, coming up with statements like "the Irish voters were not part of the agreement to save the banks anyway". The audacity! But anyway, at a more pragmatic level, this might affect us euro-paying home owners because the Irish have in effect declared that they might leave the Eurozone. Unbelievable as it may sound, it may be their only choice - they default on their loans and go back to a devalued Punt. This will drop the Euro FX rate like a rock. In which case all sorts of things might happen, including interventions by the Swiss to prop it up as they always do (in vain). The most likely outcome in my opinion is the ECB raising rates to attract buyers and hold the Euro's value.

Of course all this will be done under the guise of "improving economy means higher prices so we are raising rates", but we will know better. Bear this in mind if you are negotiating interest rates or refinancing. Of course I might be wrong and the ECB prints yet another truckload to save the re-re-re-bankrupt from themselves, but politically I don't think so. Interest rates are the least controversial action that the populace will accept without revolution!

Very often banks attach conditions to their mortgages, for example your account has to be a "nomina" account, or you need to buy one investment/pension product with them etc. Invariably, they also require you take out their life insurance. I'm guessing the commissions they make out of that warrant the pressure they give their clients.... but it might not be all negative. Bear in mind these 2 points that I personally was not aware before:

Ask your bank if they can include the life insurance cost as a one-off payment and merge it into the refinancing amount. It does not count as an increase of the hipoteca, i.e. it qualifies for subrogacion. (Normally you cannot subrogar and increase the amount, but including periferal costs is ok). Very often this will result in substantial savings too because you are paying ahead of time the whole insurance premium - I had a 60% saving over my existing monthly-payments life insurance.

If you are a couple and the mortgage is to be on both your names, check the weighting of the mortgage amount. Men usually pay much much much higher premiums - we are just made of weaker material obviously! So instead of the obvious 50% of the mortgage payable on the man's death and 50% on the woman's, investigate if the bank can put 75% on the woman because that might save you a decent amount of money.

Next post, we put some numbers out comparing real spanish banks mortgages.

I don't know how many Eyeonspain readers watch the Foreign Exchange markets, but I'm a firm believer that more people should in general. In fact, if I were ever Education Secretary this would be a 3 hour per week subject in the syllabus. It tells us a lot about life.

On the 18th of Feb something interesting happened in FX options markets: a huge sum of contracts on the EUR / USD pair was bought, to the value of 100,000,000,000 (100 billion) USDollars. Huge sums change hands in FX markets, but this is the options market and this is one big sum for one trade. In other words, someone has made a 100 billion dollar bet that Euro will fall against the dollar within one month. I.e. someone is expecting some big bank to fail in the Eurozone or interest rates to be raised by a big amount in the US.

Bear with me before I draw my conclusions, there is another relevant data point: the GBP has massively risen against the JPY (japanese yen) during February. This indicates again that an interest rate hike is imminent in the UK. This is also Euro-bearish, i.e. we would expect the value/popularity/strength of the Euro to drop dramatically from the high levels it's enjoying right now.

What does this mean for us mortgage payers? I believe that the ECB will have no choice but to follow suit. The bank(st)ers of the world will have to raise in unison because otherwise the imbalances will not be beneficial to anyone (carry trades will ensue), and combine that with yesterday's G20 statement "we will address the imbalances" and presto! you have simultaneous interest rate hikes accross the world.

Oh sure, I've been wrong more times than I've been right - but please consider your refinancing/remortgaging moves with this in mind. Watch March events carefully.

Typical of the banks to have you pay for the survey of your property that they will hold ransom until you repay your mortgage. And they choose the surveyor on top! But anyway, what can you do? Actually, you can ensure that the bank makes the survey free subject to you taking up their mortgage. If for whatever reason the deal does not happen then you pay for the survey, but if you proceed with the mortgage then push them to absorb the cost.

Present as many IBI receipts from past years as you can. If you can show that your "valor catastral" (the official property price) has been revised upwards in the last few years then you can apply some "pressure" to the surveyor to estimate at a higher price. Remember, this is not like your typical UK survey, this is a lot more subjective as it only assesses the market value of the property. And if the bank is willing to give you money (otherwise they wouldn't be reaching the tasacion stage) then they will want the price to be estimated higher.

Make sure you are upto date with your community fees, they always have the possibility to check it, even if they don't always do.

Paint over any problem areas - don't worry about structural issues, they are not checked for these purposes. Amazing but true in my experience, surveyors for bank mortgages hardly spend any time inside the property.

Then sit back and cross your fingers!

This is probably one of the biggest dilemmas when shopping around for a mortgage to refinance your existing one. You have 2 basic choices:

- cancel your old mortgage, pay any early cancelation penalties if applicable (law says max 0.5% of outstanding amount), and contract new mortgage as you would normally.

- subrogate your mortgage via another bank. Forgive me for not knowing the correct term in english but in any case, in Spain you would need to know "subrogacion" to ask for it. This means you are changing lender but keeping the same mortgage (you cannot increase the amount), and this is a tax free transaction.

The laws in Spain have finally come out of their prehistoric conditions and now allow reasonable re-financing terms for subrogaciones. At first glance it seems the obvious and cheaper choice. However, there is one element that I personally was not aware of, and I present it in this post in case it benefits someone else. Excuse the laymans language, it's because I am one!

Assume you chose a new mortgage with a new bank. The conditions are better and you have made your calculations and you are happy. The new bank will make a "oferta vinculada", which is an offer to you linked to your existing mortgage. Your existing bank now has an opportunity to answer with their own offer. Now here comes the catch: if the "old" bank offers you a lower interest rate you *have* to take their offer. I cannot stress this enough: if your existing bank offers you a lower interest rate than your new bank does, you are obliged to accept the offer with the lowest interest rate. Regardless of what the overall benefits are. On top of it, the counter-offer need only be valid for one year, so not only the old bank stops your new deal from going through but they might punish you next year with their usual higher rate, or worse. I have had this repeatedly confirmed by various sources but if you know differently please let me (and all readers) know by leaving a message below.

What would I do in this case? I would say take the risk anyway, go for subrogacion, try to get a deal that does not have a high initial rate even if it means that overall you save money, and see if the old bank can come up with something anyway. In the meantime, agree with your new bank that your Plan B is that if it came to it, you would cancel your old mortgage and not go the subrogacion route. Yes, I know, not a very tidy way of doing business. But then you knew that about the world of banking the moment you walked into one as a kid! 

So to summarise, I personally would not cancel my mortgage outright, try subrogacion first, bearing in mind the unreasonableness of the existing law, and then judge accordingly depending on what the existing bank counter-offers. Good luck! I mean it.

Obviously the key question is will they go up or down. Obviously? I think it doesn't matter in the long run. Even if you manage to get a decent fixed rate right now it won't be a favourable number if it's fixed for more than 3 years. The best I could find here in Spain is Barclays 2.99% (let's call it 3% shall we) for 3 years, then Euribor + 0.59 (the latter depends on various personal circumstances, so it's an approximate value). It's not bad at all, and it does seem that all banks have raised their base interest rates in the last 6 months by a huge amount in percentage terms. However, there is no saving us from higher payments now or in the near future, so isn't it better to get a deal with lower variable rate, which do exist if you shop around.

So what can we do? I am about to refute my own argument above - this is how one arrives to hopefully the best solution. It appears that a huge spike in interest rates is imminent. They are already evident in prices of commodities such as wheat and cotton. They've gone parabolic in international exchanges. They are usually a good predictor of higher rates, not because of an improving economy, as the powers that be would have you believe. It's because there is so much bad debt out there which will not be repaid - from individuals AND whole countries - that lenders now simply demand a higher interest rate for their loans to compensate for their risk. So whether Euribor will rise or not in sync with the commercial rates is immaterial in the short run. It will have to follow because otherwise Member States will not be able to refinance unless they offer higher interest rates for their bonds. Or, print the money to pay their debts. This latter is what commodity traders know, so they ramp up the prices in anticipation of what they know will be diminished value of each individual dollar/euro.

So if a huge spike in interest rates is imminent (according to my simple brain) then I would go for the best fixed rate deal I can find for 2-3-4 years, and then the variable rate can be planned for later. I am preparing myself for the possibility of double digit interest rates. Calling Barclays now!

As I have mentioned already, this blog is not an elaborate essay writing, it's only a blog. So we go straight to the meat of the post:

So let's assume that you are looking around for alternatives to your current mortgage/hipoteca. What should you look out for? Here's some elements that you may or may not know, I didn't:

- Watch for the difference between initial interest rate (usually valid for the first year) and the interest rate to apply in subsequent years. Normally, if you go for a variable interest rate mortgage, they would be some value on top of Euribor, but sometimes it's not. Be careful if there's some limit below which it cannot go etc.

- Always ask if the bank has a "convenio" with your profession. In Spain many professional associations have special deals with banks and they are wildly varied. For example teachers get preferential interest rates, in theory because of the stability of their job - but this depends on the bank and the school, each agreement is separate. So it's worth asking whatever your profession is, even if you are independent contractor, you never know.

- See what conditions are attached. For example, the new bank might demand that you take a life insurance policy via them, that is a typical condition. Consider that even if you already have your own, their policy might be more beneficial if it does away with the account costs or credit card charges or any other side benefits that are not obvious at first sight.

- Some banks cover some of the refinancing costs. I only know of Barclays Hipoteca cambio de banco, but maybe you can leave a comment with others you know of, who cover the legal and administrative costs of changing your mortgage bank. However they may not cover the cancelation penalty of your old mortgage. On that note, beware the new laws specify a maximum penalty of 0.5% regardless of what the actual contract says.  Don't pay more!

Next post will be about the differences between a "subrogacion" of a mortgage and outright cancellation. There are some pitfalls there too as I've discovered to some (not much) pain. Thanks for reading.

I will be assuming that my audience is composed of people who have a mortgage and are interested in financial matters. So please forgive me if I sprinkle my posts with financial terms without explaining them, you can always leave a comment asking for clarification and I will do my best to expand on it.

Firstly, why would you want to change your lender? Perhaps you are happy with the mortgage company/bank that you are with at the moment, and you've done some research and they are one of the cheapest anyway. Here are some reasons:

- interest rates are rising - fast! What you pay now is lagging the market by almost a year. Interest rates are going to be felt throughout the economy starting from this summer, so your evaluation has to include future interest rates, not just current payments.

- banks vary wildly in their treatment of refinancing. In my experience, Banco de Andalucia for example will not budge one inch in lowering your payments, even if you threaten to leave. Only after you've walked to the notary with another bank will they make (perhaps) another offer. So don't always assume that you can convince your current bank to refinance internally.

- if you are thinkingthat the new law of forcing banks to remove the "suelo" (minimum interest rate level) will put pressure on your bank to review your mortgage you might be greatly dissappointed! Many banks are currently appealing this decision and will be dragging it on for years.

This was by way of introduction today's post - I will write more specific information in my next post. Beware, I might be listing banks by name!