Understanding commonly used mortgage terms in Spain

Understanding Commonly Used Mortgage Terms

There are many terms that are commonly used in the mortgage and property world. If you are unsure what they mean, it can make mortgages seem tricky and confusing to navigate. We have created a glossary of key mortgage terms to make this easier for you:

1. Loan-to-value (LTV)

This is the ratio between the loan you are taking out with the bank and the value of the property as a whole, the resulting figure is expressed as a percentage amount which will be paid as a deposit for the property.

2. Eligibility

In Spain, the standard length of a mortgage is usually 25 years, subject to eligibility criteria, usually based on affordability. In order to establish if you are eligible, banks will look at income, employment type, age, your credit score and any debts you have, the type of property you’re buying.

3. DTI (Debt-to-income) ratio

Banks determine your borrowing risk by calculating the percentage of your gross monthly income (before taxes and other deductions) that goes towards paying your monthly debts. A low debt-to-income ratio demonstrates a good balance between debt and income and means that your request for a mortgage is more likely to be accepted. This value is calculated with the following formula:

Total of Monthly Debt Payments  ÷  Gross Monthly Income = DTI

4. Interest Rate

Interest refers to the amount that you are charged for your loan and is materialised as a percentage of the total you owe, charged monthly.

5. Fixed or Variable interest mortgages

With fixed interest mortgages, the value of the interest percentage is a predetermined rate that does not change until the agreed period of time for the mortgage has elapsed. Adversely, the percentage fluctuates monthly with variable interest mortgages, therefore some months you may end up paying more or less than you expect.

6. Euribor (Euro Interbank Offer Rate)

Euribor is a reference rate based on the average interest rates at which European banks borrow funds from each other. This affects variable interest mortgages, as it is written into the agreement for this type of mortgage that you will have to pay the Euribor-rate plus a fixed commission, for example Euribor +1%.

7. IVA Tax (Impuesto sobre el Valor Añadido)

The Spanish equivalent of VAT in the UK. The IVA rate for property purchases is 10%.

8. NIE number (Número de Identidad de Extranjero)

NIE is a tax identification number for foreigners in Spain, which allows the Spanish government to assess and process annual tax payments and the annual wealth tax, both of which are declared by resident and non-resident property owners. An NIE is required in order to purchase property in Spain as a non-resident. If you are an EU citizen in Spain for longer than 3 months after acquiring your NIE number, you are required to register for a government certificate that shows your NIE number.

9. Mortgage opening/set-up fee

A fixed fee charged by the bank in order to set-up the mortgage, charged at a percentage of the value of the mortgage.

10. Valuation

Before granting the mortgage, the bank will require that the property be valued by a registered valuation company. The cost of this varies depending on the value of the property.

11. Notary

A professional within the Spanish law system who certifies Spanish documents and legalises agreements and contracts. When finalising the mortgage deed, a notary stamp is required and this will incur one-time additional fees.

12. Completion costs

The costs incurred by a qualifying buyer, made up of the deposit, bank fees, commission charges, notary fees and taxes. This is a one-off payment which is then followed by monthly mortgage charges.

We are always happy to answer any questions so please do not hesitate to get in touch and ask.

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