MORTGAGES IN SPAIN

Spanish government to be guarantor on mortgages for young people and families with children

On May 7^th 2023, the Spanish Prime Minister, Pedro Sánchez, announced a new measure to improve access to home ownership for young people and families with children. For those that qualify, the government will provide a guarantee to cover 20% of the purchase price in such a way that the buyer will be able to finance 100% of the purchase without having to pay a 20% deposit.

However, the buyer will need to have sufficient savings to pay the expenses and taxes associated with the purchase, the cost of which is usually equivalent to between 10% and 12% of the property value.

Some political groups believe that the introduction of this scheme will push property prices higher. In the United Kingdom, a similar measure made some types of housing more expensive, but the Spanish government appears confident the same won’t happen in Spain, claiming this initiative (as part of a wider housing policy) will not stimulate property price inflation.

One condition of the scheme is that the 20% government contribution must be repaid in a maximum of 10 years. This means that a young buyer will need to earn enough to cover the monthly repayments of a mortgage (likely with a duration of 30 years) and the debt of returning the 20% from the government within 10 years.

To be eligible for this scheme, one can earn a maximum annual salary of 37.800€ before taxes. This inevitably limits the budget available for the property purchase price.

Furthermore, there are already doubts as to whether the banks’ risk departments will applaud the scheme. Most banks when offering mortgages apply comprehensive and strict lending criteria, including on the minimum deposit relative to property value. This practice is based partly on the assumption that buyers with a substantial personal stake in the property are less likely to default on repayments. Government funded support, particularly for lower income borrowers, may not deliver the same degree of security for some lenders.

Whether this government initiative will be successful of course remains to be seen, but the banks are currently working intensively to study the detail and how to apply it.

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