Buy-to-let: bank offers 113pc mortgages – on repossessed flats in Spain
While banks at home are avoiding the lending excesses of the past – such as the notorious 100pc-plus loans that helped bring down Northern Rock – other European lenders are following a different tack.
In a bid to shift repossessed newbuild apartments, Spanish lender Banco Popular is offering a zero-deposit mortgage that also gives “cashback” to buyers up to 13pc of the property’s value.
In other words, a mortgage of up to 113pc of the property price.
Properties are available across the country. An apartment complex in Costa del Sol, for example, is being sold off piecemeal, including a £68,000 two-bedroom flat and £172,000 four‑bedroom penthouse.
The 113pc loan-to-value mortgage therefore reportedly lends an extra £22,360 on the four-bedroom penthouse without asking for a penny in equity.
The mortgage tracks European interbank rate “Euribor” plus 0.9pc for the first year, rising to 2.39pc plus Euribor afterwards.
By comparison, most Spanish mortgages tend to require a minimum 30pc deposit and interest rates start from 2pc above Euribor.
Unlike mainstream mortgages, these loans only apply to particular homes. Buyers can choose from a handful of Spanish apartments – all of which have been repossessed from bankrupt property developers and are now owned by the bank.
“People view it as free money,” says Tim French of Iberian Properties, an estate agent and mortgage broker based in Spain. “I try not to market too many of these properties, as there are risks involved.
“Over the last five years there have been a lot more British buyers interested in these types of deals, I think mainly because sterling was weaker, and interest rates are also low.”
Mr French told Telegraph Money: “The bank wants to get rid of these properties. It lent aggressively to developers before 2007, but when the credit crunch hit, their developments didn’t sell. When their valuations dropped, these properties ended up having mortgages higher than their value.”
Banco Popular, the fifth-largest Spanish bank by deposits, has set up an online property portal, Aliseda, to market the homes. The properties are also being snapped up by investment firms to market to British people interested in buy‑to‑let.
But commentators are sceptical that many borrowers would actually be offered such a risky loan. “In my experience, the bank will come back to applicants with 100pc instead, but it all depends,” said Mr French. “We never know exact figures with these things, the banks make it up as they go along at times.”
Banco Popular was not available for comment.
“I would question why 110pc mortgages are being made available,” said Simon Conn, an overseas property broker.
He said: “Why has the property been repossessed? Is it because the original owner had personal cash-flow problems, or is it that the property is situated in a poor location and therefore could not attract the potential renters?”
There is little prospect that these particular properties will increase significantly in value, he added, arguing that Spanish homes remain over‑supplied in many regions.
“It is unlikely there will be property growth in Spain for many years to come,” said Mr Conn. “This is due to the number of properties, including those that are repossessed, which are still available.”
But with a strong pound, helped by languishing property prices in Spain, surely there are bargains?
There has been a 48pc surge in interest among British buyers looking to buy in Spain, according to data compiled for Telegraph Money in January.
Andalucia, the region including Costa del Sol and Seville, is the most sought-after Spanish location among British buyers, where the average budget is £379,000, according to Rightmove, the property comparison website.
However, the Spanish property market is flooded with approximately 650,000 unsold homes, with average prices 30pc lower than in 2008.
THE FEES AND COSTS
As with any Spanish property buy, borrowers must foot the bill for notary fees, stamp duty and property taxes, which typically add an extra 15pc to a home’s value.
Buying a £100,000 property, for example, could attract a £1,000 solicitor’s fee (1pc of the purchase price), £1,000 in stamp duty tax (1pc of the purchase price), £500 for registering the property and a hefty £10,000 VAT bill (10pc of the value of new build properties). Local taxes might also apply.
There are added costs if you buy via an investment firm. One company, PCG Invest, which is selling 50 of these properties, with the mortgage underwritten by the bank, charges £595 for borrowers to apply for the mortgage, which is non-refundable if the applicant is rejected.
The apartments offered by PCG are situated in Coto Real Duquesa, an apartment complex near the south coast. They have never been lived in, but the firm says they are all finished with the utilities such as water and gas switched on.
However, PCG appeared confused over its own fees. When Telegraph Money asked for a cost breakdown, the firm reduced the application charge to £395 and said it would refund half if the mortgage is refused.
It later added that a bill of £4,995 is payable once the mortgage is approved. This is for “services” such as finding the property, setting up utilities in the house including gas and water, and providing an “NIE Number”, the identity number required of all home buyers under Spanish law.
Of course, buyers could cut out these unclear charges by approaching Banco Popular directly.
Lending affordability criteria applies, just like in Britain, which means you will have to prove that roughly 30pc of your take-home pay is free to foot the repayments. You would need to provide proof of income and evidence of your fixed outgoings just as with a British mortgage application.
Darren Brown, PCG Invest chief, said: “We don’t own the properties but have negotiated a deal with the bank to market them, and we arrange for investors to go to Spain and choose the property.”
He acknowledged “risks and costs involved” including that there is no guarantee the property will actually be rented.
He also acknowledged the fact that those rejected for the mortgage would be left £198 out of pocket.
How US housing went from boom to bust
From the 1950s to the late 1990s, US house prices roughly kept pace with inflation. After all, America is not a densely populated country and there are much fewer constraints on supply than in the UK, for example. This led to plenty of suburban sprawl, but also kept housing reasonably affordable.
However, from around 2000, prices began to take off. The Federal Reserve’s efforts to shield the economy from the collapsing tech bubble by slashing interest rates helped to fuel a property bubble instead.
Banks got creative with mortgages. They loaned large sums to people with low or no incomes, and then sold the loans on to yield-starved investors – the notorious ‘subprime loans’. With more money being thrown at houses, prices went up.
And of course, people then came to believe that property prices would never fall. The house could always be ‘flipped’ for more than it cost. So neither borrower nor lender fretted about how the loans would be repaid.
As a result, from 1999 to 2006, the average US house price doubled (a gain of around two-thirds, if you account for inflation).
Then the party ended. One too many dodgy loans had been dished out. Repackaged loans started to go bad, poisoning the complacent financial system. The US housing market was hit by a wave of foreclosures (repossessions).
Prices ended up sliding by more than 33%, after inflation. And it took until 2012 for them to hit rock bottom.
Since then, prices have risen by about 25%. And US property-related stocks have been strong performers.
So what changed? Why did the market rebound?
Many people did end up losing their homes. But the wave of foreclosures that was supposed to swamp the market turned out to be smaller than predicted. That was partly because many loans turned out to have such shoddy paperwork that the contracts couldn’t be enforced. And quantitative easing and low interest rates also kept the mortgage market working, keeping many people in their homes.
Meanwhile, construction collapsed. This cut the number of new homes coming onto the market. And finally, investors piled in. Banks bought up property bargains as an investment. Private foreign investors jumped in too. Last year, Chinese investors alone poured an estimated $22bn into the US property market.
Every property bubble has a statistic that brings home how crazy things are.
For example, at the height of the Japanese property bubble in the 1980s, the land around the emperor’s palace in Tokyo was said to be worth more than the entire state of California.
Now we’ve seen the British equivalent. The value of London property is now higher than Brazil’s GDP, according to research by estate agents Savills.
The big questions now are – what will make the property bubble burst? And how far will prices fall?
Foreign money has kept the London property bubble inflated – but now it’s leaving.
If you’ve been watching the recent BBC shows about the super-rich, you’ll know that one of the big factors driving up London property prices has been foreign investment.
Up to 70% of the property sold in central London in the last few years has gone to non-UK residents. For London as a whole, the figure is around 20%. By far the biggest group of buyers is the Russians. They account for one in every five property sales worth £10m or more.
You can see the appeal. As well as the shopping, museums and schools, you have a very generous tax system for those who aren’t British citizens. The reliable rule of law and political stability is another big draw. If you were a Russian oligarch, would you rather keep your money at Putin’s mercy in Moscow? Or squirrel it away in London?
And it’s not just Russian buyers who are drawn by these benefits. The rolling eurozone crisis has sent a lot of money Britain’s way. You can bet that the ‘Arab Spring’ had a similar effect on funds from the Middle East.
As a result, lots of the wealth generated by $100 a barrel oil has gone into London property.
Falling property values and soaring costs are forcing expats home – where some face fresh difficulties.
Like thousands of other British expatriates, Bob Puddicombe and his wife, Phyllis, found that their retirement dreams of a place in the sun turned into a nightmare following the financial crash.
After 13 years living in the south of Spain, the couple returned home in 2012. Their three-bed spanish villa in Almayate, near Malaga, was initially on the market for €250,000 (£206,000). It eventually sold for just €87,000 (£71,500). They have moved back to the Plymouth area, where they lived before moving to Spain.
Mr Puddicombe, who is nearing 70, said they decided to return to the UK as they were getting older and wanted the security of the NHS. But at the same time the adverse exchange rate has hammered the value of their pension in recent years.
“At least we were able to sell spanish villa, and have used the proceeds to buy an ex-council house back in Britain,” he said.
But many of the friends the Puddicombes left behind have not been so fortunate.