Brits abroad: negative equity in Spain
Negative equity in Spain is a big problem among British property owners.
Thousands who bought at the height of the boom with high loan-to-value mortgages now find themselves with a property worth less than their mortgage debt.
Getting out of this situation presents a challenge, particularly if your financial circumstances have changed since you took on the mortgage. These ‘mortgage prisoners’ often believe there is no way out of their predicament.
So what exactly is negative equity in Spain?
Negative equity is the term used to describe the situation when your mortgage debt is higher than the market value of your house. For example, your property in Spain might have a market value of €120,000, but the amount owing on your mortgage loan is €150,000. The difference between the two sums is - €30,000, your negative equity.
But it's not that simple. When calculating your mortgage debt, you need to include:
- The amount you owe on the mortgage (if your mortgage is interest-only, you still owe the entire amount you originally borrowed).
- Any missed payments.
- Penalty interest on these payments (limited by law to a maximum of 3% more than typical interest rates).
- Legal fees if the bank has initiated procedures against you for non-payment.
What is the current situation with negative equity in Spain?
Prior to late 2007, Spain experienced an unprecedented property boom with demand outstripping supply, particularly in areas popular with tourists and second homeowners. In most parts of the country, prices rose to their highest ever. In tandem with this, banks approved high loan-to-value mortgages (up to 90% in many cases and sometimes over 100%) with little regard for affordability or the applicant’s financial circumstances.
When the property market crashed (between 2008 and 2012), prices plummeted and in some cases, fell to less than half their value. As a result, thousands of homeowners found themselves with loans that were worth far more than the property. While the Spanish property market has recovered considerably and values have risen, property prices are still below their pre-crisis peak in many parts of Spain. In addition, many homeowners took out interest-only mortgage loans – usually valid for 5 to 10 years – and as a result, have paid off little capital. Their mortgage debt has therefore not changed since they took out the loan.
Is it wise to sell a property with negative equity?
Technically you can sell a property with negative equity, but you would find it very difficult to find a buyer prepared to buy a property with a higher mortgage debt than its value. Let's say you manage to this this, the remaining issue would then be your mortgage lender wanting to still pursue you for the outstanding debt on your loan.
The best approach would be to find a lawyer that can negotiate a sale to the bank on your behalf.
This process is known as a compraventa con quita and is an advantageous concept for both parties – you cancel your mortgage debt (we will ensure complete cancellation) and the bank becomes the owner of the property without incurring repossession expenses.
Still confused and want to know more? have a look here for more on negative equity.
How can adviserly help if I have negative equity in Spain?
The first step is to get in touch with us. We’re here to help you find the optimal solution to your negative equity in Spain so you no longer have to worry about your property debt. There are several options open to you and most involve your mortgage lender/bank.
These options require careful negotiation to ensure you obtain the best solution to your negative equity.
Produced by Amirali Khezrey 24/03/2022