The combined effect of the weak pound against the euro, lower returns on investments and the ever increasing cost of living in Spain has left many short of cash and in need of refinancing.
Although the global credit crunch may have reduced the number of products available there are still many products available in the market place, ranging from ordinary mortgages, equity release schemes, through to life-time loans/mortgages. Borrowers are often blinded by their immediate need for cash, a lack of available options, and poor financial and legal advice as to the long-term consequences of such products.
Spain – an unregulated market place
In many ways Spain is very much an unregulated market place and all the free newspapers on the coasts carry multiple advertisements from financial advisers, many of whom are unregulated and furthermore are not authorised to offer investment advice or sell such products in Spain. All these advertisements highlight the fact that many retired couples are asset rich but cash poor and should be enjoying life and not struggling to make ends meet.
Complex products
Many of these products are incredibly complex and clients will be encouraged to borrow more than required and then to invest the balance off-shore, supposedly earning a return over and above the cost of borrowing such that the cash out element can be at zero cost. These types of schemes rarely release more than 25% of the value of the equity to the home owner but earn sizeable commissions for the broker putting forward the schemes and managing the investment side of the product. The home owner may well be left with a high interest mortgage, find that target returns on investments are not being achieved, currency exposure, and taking into consideration the high set up costs obtain only a small amount of cash compared to the equity in the property but with considerable long-term risk.
Ordinary mortgages
These tend to be more straightforward but they do carry higher set up costs and normally higher interest rates than a mortgage obtained for the purpose of buying a property. The real risk here is the ability to continue to meet monthly repayments once the capital sum obtained has been spent and also an exposure to interest rate rises.
Equity release schemes
Standard equity release schemes generally do not receive good press and more so in Spain where such schemes are totally unregulated and those availing of them have little or no protection if everything doesn’t quite go to plan. In worst case scenarios homes can be repossessed. Risks vary from property prices falling, to currency exposure, through to investment under-performance, any of which could result in a negative equity situation. Furthermore these schemes normally need to be re-negotiated every 5 years and regular interest payments need to be made and early repayment penalties will apply.
Lifetime loans
Lifetime loans work quite differently to standard equity release schemes and in many ways offer some level of protection against the risks cited under Spanish equity release schemes. The better schemes are as implied ‘lifetime loans’ and do not need to be repaid until death, but can be repaid early without penalty, the full amount raised is available to the borrower, either immediately or in staged draw downs, no amount needs be invested off-shore, interest is normally added to the loan and is not paid until the loan terminates or the house is ultimately sold. However there are products in the market place branded as lifetime loans which still have many or the risks associated with equity release schemes. So as the English metaphor says beware of a wolf in sheep’s clothing!
Spain – a harsh climate
When something goes wrong in Spain the borrower has little protection and mortgage deeds can contain harsh clauses as to how penalty interest may be calculated and legal fees applied should the borrower be in default or in arrears. Furthermore, repossessions are on the increase and this trend is expected to continue and it is almost impossible to sell in the current market.
Conclusion
If, after exploring all options, including downsizing, re-financing is the way forward, then proceed with caution and thoroughly research the market for available products and seek independent financial and/or legal advice from regulated and authorised practising professionals who are not in any way associated with the agent/provider and who will not earn any commission whatsoever from the transaction. Thoroughly understand all charges and commissions regarding set-up costs, on-going costs, and final settlement charges. Make sure the policy documentation correctly addresses all the typical what if scenarios.
Article originally published in Spanish Homes magazine – July 2008
