Financing a property purchase in Mallorca

With more than 2,750 hours of sunshine a year, Mallorca is one of the most popular regions for buying a holiday property. Small wonder that more and more foreign buyers want a house or a finca on the island. For a good experience when buying in Mallorca — alongside the search through portals or an agent — what matters most is how you finance your property abroad. That is a decisive step, and there are several ways to go about it. You can take a loan with a Spanish or a German bank, you can turn to private investors, or you can mortgage a property at home so that no separate financing for the Mallorca purchase is needed.

Before financing comes the question of cost. Just as in Germany, in Spain purchase costs of 10 to 15 per cent of the price arise when you acquire a property. The overview below shows how they are made up:

In total, the purchase costs for a house in Mallorca therefore come to 10 to 15 % of the price — similar to Germany, and towards the upper end for higher-priced properties. Legal and gestoría fees are formally optional. They cover the review of the purchase contract and the official documents and should always be budgeted for.

By the way: a gestoría is a Spanish administrative office specialising in bureaucratic and administrative procedures. In Germany those tasks are usually handled by tax advisers, lawyers or notaries.

If you want to finance a house purchase in Mallorca, the amount payable is above the purchase price. What that means in practice is shown by the example below. If you buy a house in Mallorca for 750,000 euros, the following additional costs arise:

In other words: if the price of your dream property in Mallorca is 750,000 euros, you have to spend 830,500 to 842,750 euros including costs. It is important to know that these additional costs often cannot be covered by a loan for a property abroad. That applies above all if you want to finance the purchase through a Spanish bank.

In many cases you can turn to a Spanish bank to finance your property. Whether you are permanently resident in Spain or want to use the house as a holiday or rental property makes no difference at first — except where the terms are concerned, because these are usually better for residents. Beyond that there are some particularities when you finance a property abroad with a Spanish bank. The overview below shows which ones:

• Loans are not available for every age group, or only with a shorter term. The term of the loan plus the borrower’s age may not exceed 75 years, for example.
• As a rule, Spanish banks grant fully amortising loans that must be repaid by the end of the fixed-rate period. That means higher instalments. In return, the term is 15 to 25 years (in some cases up to 30).
• Spanish banks accept the new house in Mallorca as security but require 30 to 40 per cent equity against the purchase price. As the additional costs also have to be covered from your own funds, you need equity amounting to 50 to 55 per cent of the price overall.
• Spanish banks watch the security of their investments closely and therefore often set limits on the instalment. It should not exceed 30 per cent of net income if you want a Spanish loan for a property abroad.
• The interest rate is often variable. It is based on the Euribor — the rate at which banks lend to each other. Spanish lenders usually add a margin of 0.5 to 1.5 per cent. It is important to know that your instalment can change with the Euribor, because the rate is adjusted annually.

Good news on the loan costs: since November 2018 the bank has borne the stamp duty on the mortgage deed, and since June 2019 the notary, land registry and gestoría costs of the loan as well. What remains with the borrower is the valuation of the property — usually 300 to 600 euros — and any copies of deeds requested. Older cost lists that still attribute 0.3 to 1 per cent of the loan amount to the buyer for the notary and land registry of the mortgage no longer reflect the current legal position.

On top of that, the terms are often poorer for non-residents. If you want to finance a house purchase in Mallorca, it is therefore always worth comparing with a German lender.

Many German banks do not finance the purchase of a property in Mallorca directly — unless they specialise in property abroad. Anyone who nevertheless wants a German lender usually has to take indirect routes, for example through security at home. The reason is that these institutions do not accept Spanish houses and apartments as security. Below we show under which conditions you can finance your property indirectly:

• You conclude a loan agreement with a bank in Germany in which you pledge property or other assets in the country as security.
• You then have the loan paid out in full and appear in Spain as a cash buyer.
• The advantage is a German contract with contacts who speak your language and familiar terms. You obtain a longer fixed-rate period and so avoid your instalments rising sharply with the Euribor.

Especially if you want to buy a luxury property in Mallorca, however, this route only works with sufficient alternative security. It is still worth considering the option and obtaining loan offers so that you can finance the purchase in Mallorca affordably.

Mixed forms of financing are often interesting too: a combination of equity and borrowing that keeps the loan with a Spanish bank small. The advantage is that the chances of obtaining financing rise and the terms are often better because of the low loan-to-value. How that works is shown below:

• First you mortgage your German property or other unencumbered assets. In that way you generate equity with which you cover the additional costs and at least 30 to 40 per cent of the price.
• For the remaining sum you apply for a loan with a Spanish bank. It accepts the new house as security and makes it possible for you to finance the purchase in Mallorca safely.

Alternatively you can turn to private investors to arrange the loan reliably.

When it has to be quick: if you are competing with other bidders and your credit standing allows it, you can bridge the amount needed at short notice. You pay for the house in Spain in cash and only afterwards arrange affordable, long-term financing for the property in Mallorca.

Unlike in Germany, the lending value applied by Spanish banks is comparatively low at 60 to 70 per cent. You cannot include the additional costs in the loan and normally have to repay the loan in full within 15 to 25 years. That, and the link to the fluctuating Euribor, results not only in variable but often also in higher instalments.

Financing a house purchase in Mallorca through a German bank, however, is not always possible either. The reason is often a lack of security — the house in Mallorca itself does not count as such. As an alternative you can mortgage assets at home and finance only part of the cost of the Mallorca purchase. That improves your chances of a loan and usually brings better terms.

If you want to finance a house purchase in Mallorca safely and affordably, there are a few tips to follow. The overview below shows which:

There is a great deal to consider when buying and financing a house in Mallorca. Rely on the expertise of experienced agents and do not take unnecessary risks.