I choose the word ‘need’ carefully for it is more urgent than the alternative ‘want’ and adds more strength to the issues discussed. For most readers though the ‘need’ word will apply, perhaps not in all cases, but certainly in some and I would stress an understanding of how the issues impact you.
1) Purchase. It goes without saying that a significant percentage of people buying here cannot purchase outright for cash. For whatever reason, they do not have access to the necessary capital and therefore, irrespective of age, they will need assistance in funding.
Now there are various types of purchasers;
i) The investor or speculator. They will want the cheapest, most economical route to acquiring property so, with mortgage finance available even to non-residents up to 80% and perhaps more, they will not need to use their own capital and the lender will help carry some of the risk.
ii) Holiday Homes. A lot of would be retirees sample the country by buying a property here whilst retaining their main home as well as their jobs back in the UK or otherwise. With easy access to mortgages back in their own country it is tempting to borrow against the main home but I would question the danger that goes with that. Better to put the finance for an investment property on the same.
iii) Retirees. This is self explanatory and most people in this category would look to buy for cash. But why would you do that when you have a risk for Inheritance Tax, currency exchange and the potential to earn a greater return on your capital than borrowing in euros. More on these points to follow.
2) Inheritance Tax (IHT). It is dangerous to blow this issue out of perspective but is perhaps more dangerous to ignore it without understanding the current risk that all purchasers should be addressing.
What is certain is that for property purchasers here, the issues of IHT and the necessity of a Will should be a critical part of the initial planning. Having said that, time is normally on your side but, if you have a property here and have no idea how best to structure a defence against inheritance laws and tax in Spain, then best you do something about it sooner rather than later.
Inheritance laws in Spain are dramatically different than say, in the UK. Many people assume that European states are similar in this respect. Wrong! In fact, the UK is somewhat unusual in offering attractive allowances whereas the same is not said elsewhere and certainly not in Spain. There is no spouse exemption on the main home and personal allowances are small and fall to the beneficiary rather than the deceased. So there is a real need to understand and plan or you (or more to the point your beneficiaries) could get a nasty surprise.
3) Low Euro interest rates. The current average euro mortgage pay rate is little more than 3% whilst, at least for £, returns on capital are in excess of 5% without taking any investment risk at all. Now, if we take an example of a purchase here for say Euro 200,000 (£130,000) the difference EVERY YEAR is at least 4,000 euros or £2,700. So, if you utilise the ‘Interest Only’ tool and defer the repayment of the mortgage capital for say, 20 years, that amounts to a massive 80,000 or £54,000! Wow!
4) Foreign Currency Exchange rate risk. Now there is the threat of exchange rates moving against you in the above example, but the same can also be said if you purchase your asset (your property) with no liability (your mortgage) to mitigate an exchange rate risk, especially if your capital base and income is in another currency (£). Investors worldwide (and I am talking multi national conglomerates) use the offset mechanism all the time rather than running complex and risky financial exchange rate products such as Foreign Currency Futures and Options. These cost money with potentially a nil return. You can do it simply by reducing your own capital and borrowing via a mortgage.
5) Equity Release or Eventual inheritance. My experience in working in the Financial Services markets for the last 15 years has led to an odd conclusion; far too many people, parents in fact, pay far too much attention to their detriment in trying to create an eventual inheritance for their children.
By that I mean that too many folk do not enjoy their capital to the extent that some more ‘selfish’ people might. They live their lives and use their money for themselves rather than scrimping and scratching in order to pass the family home onto their kids with no mortgage liability. This is somewhat unusual in the British and, on the one hand, is applaudable but on the other crazy, especially if, by using careful financial planning, more can be made of limited capital.
As a parent, I believe that you can only do so much and there has to be a balance, especially later in our lives when income diminishes. It is at this stage, that we should be starting to bring the kids in on the inheritance planning we are making for their benefit.
Let’s take a couple of examples.
Many enquiries that we receive fall in to 2 camps; releasing equity for property enhancement (pool, garage) or perhaps to live an easier life and then , secondly, concern over inheritance tax and it’s implications on the kids.
Equity Release. This will involve a mortgage secured on the property and, in part at least depending on how much capital is released, has the potential of mitigating IHT. Sensible planning. But why should the parents pay the mortgage cost, especially when it can be arranged on an ‘Interest Only’ basis and cost as little as 250 euro for 100,000 borrowed! Chances are that the beneficiary of the estate, the kids, will be earning more than the parents now, so why shouldn’t they pick up the tab?
And the same applies for inheritance planning. A common solution is a life assurance policy written in favour of the beneficiaries, the kids again. This will provide cash to pay the IHT due rather than trying to avoid it. The kids get the house free of mortgage, tax and headaches, all thanks to careful planning by the parents. Now such a policy costs money every month, and perhaps will be an expensive outgoing for the parents. So why should they pay? The kids likely earn more and can split the cost between them. They should look on it as a long term savings plan for what they get back, the parents home, and the value of that, or even the inheritance tax element, is probably many times they would pay in premiums!
It may be that I am ‘harder nosed’ than most in this philosophy. It comes from the many years working with ordinary folk. But I see too many people, some distraught to the point of tears, with their concern that their lifetime efforts is locked away from them and later will be under attack from the tax man. They think they can do nothing but, more often than not there is a solution, albeit that pride has to be swallowed and the kids brought into the equation.
So there we have it! Some examples of why, for the majority of people owning property and have their homes here in Spain, that there is a ‘need’ to have a mortgage in euros. If you have any issues arising from this article we, at Rose FS, are available to assist you.
One final footnote! The areas I have listed of concerns are simply that! They are ‘issues’ to address and overcome. They are not ‘problems’ so there is no need to worry! Invariably a solution can be found.
Mark Mountney is a partner in Rose Financial Services, a specialist mortgage brokerage based in the Parque Comercial, Mojacar. He is a fully qualified mortgage and financial adviser in the UK with some 10 years experience in managing his own firm. Mark was also a founder of The Association of Mortgage Advisors, the trade association for mortgage intermediaries with 13,000 members.