Are you thinking of buying a property in Menorca?

Basic information before requesting a bank loan

If you need to get a bank loan or mortgage to buy a property in Menorca, we recommend you read this section in which we summarize the basic concepts related to mortgages and some considerations you should take into account before taking certain decisions.

There are 2 types of loans; personal loans and mortgage loans. In this case, we will concentrate on the mortgage loans as they are taken to purchase property.

A bank loan entails an agreement between you and the bank, by which you agree to repay the borrowed amount on a monthly basis and within a contracted period of time, complying with the conditions negotiated before signing (arrangement fees, interest rates, currency, etc)

In general, the percentage of loan against the property is of approximately 70% so you should be able to provide for the other 30% upfront. It is also important to bare in mind the cost of setting up the mortgage which includes extras such as property valuation fees, notary fees, registry fees, stamp duty, bank commissions, etc. In the event that the purchase is for a plot of land the percentage of mortgage offered by the bank will be less. For sales of properties in Menorca, banks will consider all types of properties, be they in residential areas or in the countryside. Amongst those properties we can include houses in Menorca, apartments in Menorca, villas in Menorca, country houses, farm houses, and plots of land.

Before choosing your bank, it is advisable to visit more than one to compare the different conditions they offer and to make sure you get the best deal possible. Once you have decided on your bank, the bank will request a property valuation to set the value and therefore decide what amount can be loaned. The main aspects that will be assessed are total surface area, location (also assets like sea views), light, general condition of the property, distribution, amongst others.

In order to approve the loan, the bank will ask you to provide certain information and documents that will ensure you are able to meet the monthly installments. The bank will need to have proof of your monthly income, whether you are self-employed or an employee, your working conditions (permanent contract, temporary contract, part time, etc), whether you appear on any black list, other sources of income, etc. Such information will determine whether the loan can be approved or not.

The standard procedure of purchase is the drawing up of a private contract of sale between vendor and purchaser which is then formalized by the signing of the title deed, before a Notary Public. When deciding on the timings to sign the new title deed, you must bear in mind that the process of approving a loan can take up to 2 months. Purchases not requiring finance sometimes do not require a private contract of sale before signing the title deed.

In Menorca most of the major Spanish banks are represented, also the savings banks. Generally each village on the island has more than one branch of a bank, and luckily, these days you will often find English speaking bank clerks.  All banks negotiate mortgages and loans for their clients.

Foreign investors, resident and non-resident, are candidates for a mortgage on a property in Menorca with their Spanish bank. Residents will already have the required paperwork in place to enable them to proceed with an immediate purchase.  For non-residents of Spain, additional information is required by the bank. Before a purchase is finalized, the purchaser will be required to obtain a NIE (Número de Identidad de Extranjero – Foreigners tax number) from the Policía Nacional who have offices in Mahón and Ciutadella. This is a simple process which can be completed in one morning with a current passport. Once you have this NIE number, you will be in a position to open a bank account which will be one of the requisites when formalizing a mortgage. The reason for needing a Spanish bank account even before purchase is that all amounts of money transferred from out of Spain have to be channeled through a Spanish bank account, e.g. a deposit to secure a property cannot be paid directly to the vendor, but must first pass through your new Spanish bank account. This keeps transfers transparent. This bank account will also be useful after purchase in order to manage the running costs of the house with direct debits, such as electricity, water, local taxes, etc.

We often advise prospective purchasers, even if they have not found the property they want to buy yet, to obtain an NIE number and open a bank account as this will allow immediate and speedy action when the right property is found.

Below a summary and short explanation of some basic concepts we recommend you understand before negotiating a mortgage and its conditions:

The monthly payments include the borrowed amount, or principal, plus interest. The amount to pay shall be determined by the total amount borrowed, the duration of the loan and the interest rate agreed. Interest rates can be fixed, adjustable or mixed.

It is generally recommended that the monthly installments should never exceed 50% of your income.

Fixed Rate Mortgage (FRM): uniform or stable rate, i.e. the interest rate and principal amount never varies, it is fixed.

Adjustable Rate Mortgage (ARM): the interest rate changes throughout the repayment tenure. Variations are the result of the sum of the reference rate plus the margin or differential (EURIBOR + Differential).

Mixed Mortgage Rate: composed of two stages. A fixed rate is applied during the first stage and an adjustable rate during the second. 

Commission is an amount charged by the bank in return for services offered, such as: assessment, arrangement fees, early repayment or cancellation of mortgage, revision of conditions, etc. Not all banks apply these fees and, in the event of applying them, these can vary and can also be negotiated.

In certain cases, banks will offer interest only repayments during a certain period of time.

In lieu of payment: a voluntary agreement by which the mortgaged asset is given to cancel the debt, as opposed to repaying the loan with money as such. This option allows you to avoid a judicial procedure of embargo in the event of default and not being able to pay the monthly installments.

Estate agents in Menorca will be able to give you basic information on mortgages in Menorca, but we recommend you consult your bank or a financial adviser for additional professional advice.

We hope this short explanation will have helped you to better understand what is entailed when contracting a bank loan in Menorca and what concepts need to be understood before taking certain decisions. We hope this will allow the process of buying properties in Menorca simpler and straight forward.