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EDITION: August - October 2015

Mortgage lending in Ibiza

By Armin Gutschick & Anja Sämann-Gutschick
Property buyers in Ibiza often rely on financing from a Spanish bank to acquire a premises. In order for a bank to lend credit to an individual, it is essential for the buyer (borrower) to offer the bank as many guarantees as possible.

Banks protect themselves by offering loans only to creditworthy borrowers, having analysed their economic and personal situations very carefully. It is not uncommon for a bank to request for a third party (in most cases a family member close to the borrower) to guarantee the repayment of the dept. As a general rule, the loan is insured by a life insurance which will pay in the event the borrower’s death and the bank would also have the option to repossess the property. The mortgage will remain written in the Housing Property Registry as a charge on the property. The bank will need to make sure that sum lent is not above what the borrower is able to repay. It will compare the loan with the value of the property to be mortgaged to make sure that it offers a suitable guarantee. This is why a valuation of the property is required before the bank will lend credit. Based on the valuation, the bank will determine what percentage of the property they are prepared to finance.

A mortgage is a right in rem and remains written in the Housing Property Registry. With it, the owner (the borrower) guarantees the lender (which as a rule is a bank, but which can also be a physical person) the repayment of the mortgage. In exchange, the lender’s loan is insured through the mortgage. If the holder of the mortgage doesn’t fulfil his obligations to repay the credit, the bank can terminate the lending agreement and the property may be put to auction.
The interest to be paid on the credit will be listed on the mortgage loan deeds. In Spain, a variable interest rate is often applied using the Euríbor as a base (Euríbor plus 2% for example) with the rate being revised each year. During the term of the loan, the borrower usually pays a monthly instalment fee that includes part of the credit and the corresponding interest. In Spain, the monthly fee remains the same for the term of the loan, providing that the interest does not vary.
What happens if the borrower does not repay the mortgage fee?

In the case of a first default on payment, banks will usually let at least 3 months pass before suing the debtor. During this time, payment orders will be sent urging them to fulfil their financial obligations. In many cases, the banks will offer to revise the loan agreement by extending the term of repayment or by granting a period during which only the interest will need to be repaid and not the main mortgage. If no agreement is reached with the borrower, the bank will file a claim. A court case would result in significant costs for the debtor (court fees, legal expenses, etc.) and they would also have to pay interest on arrears. The court will refer to the records in the Housing Property Registry and the property repossession will be made public in case of repossession. The property will be sold at public auction with the aim of obtaining the highest possible price for the bank to repay its loan and the additional expenses. •