Mortgage Glossary: Key terms to understand your mortgage in Spain

For most buyers, applying for a mortgage loan is a common step when purchasing a home in Spain. Comparing different banks and options is essential to select the mortgage that best suits your needs. Additionally, understanding the main terms of a mortgage contract is crucial for a clear grasp of your mortgage. This article will help you familiarise yourself with some of these key terms:

1. Borrower and Lender

In a mortgage loan, the terms ‘borrower’ (prestatario) and ‘lender’ (prestamista) refer to the two parties involved in the transaction:

• Borrower: The person or entity receiving the loan. In the context of a mortgage, the borrower is the person who borrows money to buy a property and agrees to repay the money within a specified period, with agreed interest and other costs. The borrower is the owner of the property once it is purchased, although the property acts as collateral for the loan.
• Lender: The entity or person providing the money for the loan. In most cases, the lender is a bank or another financial institution. The lender provides the loan under certain conditions, including the payment of interest, and has the right to reclaim the property if the borrower breaches repayment obligations.

In short, the borrower is the one who receives the loan (the buyer), and the lender is the one who grants it (the bank).

2. Amortisation

Amortisation (amortización) in a mortgage loan refers to the gradual repayment of the borrowed capital, along with interest, over a set period until the debt is fully paid off. This process is completed through regular payments, typically monthly, which cover both a portion of the principal and a portion of the interest.

Additionally, there are other terms you’ll need to understand within the topic of amortisation:

• Amortisation rate (cuota de amortización): The regular payment made by the borrower, typically on a monthly basis.
• Amortisation period (período de amortización): The total length of time over which payments are made to amortise the loan, by the end of which the loan must be fully repaid. Typical amortisation periods for mortgages range from 15 to 30 years or more.

In short, amortisation in a mortgage loan is the process of repaying the loan through periodic instalments that cover both the principal and interest, with the aim of fully settling the debt over a defined period.

3. Principal

The principal (capital principal) of a mortgage loan is the original amount of money borrowed to purchase a property. It is the total sum that the borrower agrees to repay to the lender, excluding interest.

When a monthly payment is made on a mortgage, part of the payment reduces the principal, while the remaining portion covers the interest. Over time, as more payments are made, the principal balance decreases.

4. Property Valuation

The valuation of the property (tasación de la vivienda) is a crucial step when applying for a mortgage in Spain. It involves determining the economic value of the property to be purchased. This value is essential for both the buyer and the bank, as the bank uses it to decide the amount of money it will lend.

The bank generally offers up to 80% of the lower of either the appraised value or the purchase price. This means if the appraised value is less than the purchase price, the buyer must cover the difference with their own funds.

The valuation is performed by an independent professional valuer, though they are contracted through the bank. To maintain objectivity, the client has the right to choose the valuation company, provided it is authorised by the Bank of Spain. The valuer assesses various criteria to determine the property's value, including location, size, and condition.

5. Interest Rate

The interest rate (tipo de interés) on a mortgage loan is the percentage the lender charges for borrowing the money. This rate is applied to the outstanding balance of the loan and determines the amount of interest payable in addition to the principal. It is one of the key factors influencing the total cost of the loan.

There are different interest rates:

• Fixed interest rate
• Variable interest rate
• Mixed interest rate

It is important to choose the interest rate that suits you best. To learn more about each type, their differences, and the advantages they offer, we recommend reading our article Fixed, Variable, and Mixed Mortgages: How to choose the best option.

6. Euribor Rate

Euribor (Euro Interbank Offered Rate) is the interest rate at which banks in the Eurozone lend money to one another. It is commonly used as a benchmark for calculating the interest rate on variable-rate mortgages in many European countries.

Euribor is reviewed periodically, typically every six to twelve months. Changes in Euribor can cause mortgage payments to increase or decrease. When Euribor is updated, it is used to recalculate mortgage repayments. If Euribor rises, monthly instalments will increase; if it falls, monthly repayments will decrease.

7. APR (Annual Percentage Rate)

The APR (Tasa Anual Equivalente - TAE) is an indicator reflecting the total cost of a mortgage loan expressed as an annual percentage. It includes not only the nominal interest rate of the loan, but also other costs and fees associated with the loan, such as:

• Arrangement and loan processing fees.
• Management and administration fees.
• Insurances linked to the loan (such as life or home insurance).
• Other expenses associated with the formalisation of the loan.

The APR provides a more accurate comparison of the real cost of different mortgage loans, as it includes all associated costs, not just the interest. By comparing APRs between different mortgage offers, you gain a clearer understanding of which option is the most cost-effective in the long run.

It is important to note that while the APR offers a more comprehensive view of the loan’s cost, it can vary based on market conditions, the lender's policies, and the amount and term of the loan.

8. Main Residence

The main residence (vivienda habitual) refers to the property where the mortgage loan holder lives as their primary and permanent home. This concept is important as it can impact the terms of the loan.

Home mortgage loans typically offer more favourable terms compared to loans for second homes or investment properties, including lower interest rates and longer amortisation periods.

9. Mortgage Insurance

Mortgage insurance (seguro hipotecario) is a policy that protects the lender (the financial institution) if the borrower fails to make payments on the mortgage loan. This insurance is often required when the borrower makes a down payment of less than a certain percentage of the home's value (usually less than 20%).

While this insurance protects the lender, the borrower typically bears the cost, usually until they have accumulated sufficient equity in the property.

10. Home Equity

Home equity (valor líquido de la vivienda) refers to the net value a homeowner has in their property, calculated by subtracting the outstanding mortgage balance from the home's market value. This equity is crucial in managing a mortgage, as it represents the portion of the property that is fully owned by the homeowner, free of debt.

As the homeowner makes mortgage payments, the outstanding balance decreases, thereby increasing the equity in the home. This means that with each principal payment, the homeowner gains a greater ownership stake in the property.

11. Unfair Terms: Floor Clause

Unfair terms in a mortgage are clauses in loan contracts that impose unbalanced or unfair conditions on borrowers, typically favouring the lender.

The floor clause (cláusula suelo) is often considered unfair. It limits the reduction of the interest rate on variable-rate loans. In other words, even if the reference rate (such as Euribor) decreases, the interest paid by the borrower cannot fall below a certain minimum set by the bank. This prevents the borrower from benefiting fully from decreases in interest rates.

When taking out a mortgage in Spain, carefully review each clause of your mortgage contract. Remember to negotiate and ask questions to avoid future problems and claims. Before signing, ensure that the conditions align with what you have agreed upon.

12. Arrangement Fee

The arrangement fee (comisión de apertura) is a one-time charge imposed by the financial institution when you take out a mortgage loan. It is calculated as a percentage of the total loan amount, usually ranging from 0.5% to 1%. The exact percentage can vary depending on the lender and market conditions.

"This fee covers the administrative, evaluation, and risk assessment costs incurred by the financial institution when issuing the mortgage. In some cases, the arrangement fee may be negotiable. If applicable, it should be clearly outlined in the mortgage loan contract.

The arrangement fee for a mortgage may be considered an unfair term if it is not properly justified, if the borrower is not clearly informed about it, or if it is disproportionate. For example, charging an arrangement fee alongside a study or management fee could be deemed unfair.

13. Cancellation Fee

A mortgage cancellation fee (comisión por cancelación), also known as an early repayment or cancellation fee, is a charge imposed by the bank when a mortgage holder repays part or all of the loan before the agreed term of the contract.

• Partial cancellation: When the holder repays a significant portion of the outstanding principal, it reduces the total debt and future interest. This may lead to lower monthly repayments or a shortened loan term.
• Full cancellation: The holder chooses to repay the entire outstanding principal, fully cancelling the mortgage before the agreed end date.

The cancellation fee compensates the bank for the loss of interest it would have earned if the mortgage had run its full term. When the loan is paid off early, the bank misses out on future interest payments, which are a key source of its income.

Remember to negotiate and thoroughly review all the terms of the contract before signing. It’s important to understand the terms you’re agreeing to and be aware of any potential future costs.

14. Mortgage Collateral

In a mortgage, collateral (aval hipotecario) is an additional security provided by a third person or entity (the guarantor) to support the borrower’s obligations. The guarantor agrees to repay the debt if the borrower (buyer) is unable to do so. This includes covering arrears, interest, and any other associated costs. Typically, the guarantor remains liable for the entire term of the mortgage loan unless otherwise specified.

15. Bridging Loan

A bridging loan (préstamo puente) is a short-term financing option that helps homeowners purchase a new home before selling their current one. This loan is particularly useful when someone wants to buy a new property but needs the funds from the sale of their existing home to complete the purchase.

• The bridging loan is typically secured against the borrower’s current home.
• It usually covers the down payment for the new home.
• The loan is repaid once the current home is sold.
• Bridging loans generally have a short term, ranging from 6 months to 1 year.

16. Subrogation

Subrogation (subrogación) in a mortgage refers to the process of changing one of the parties involved in the mortgage loan. This can involve either the holder of the debt (debtor subrogation) or the financial institution granting the loan (creditor subrogation).

• Debtor subrogation: This occurs when the buyer of a property takes over the seller’s existing mortgage. Instead of obtaining a new mortgage, the buyer assumes the current mortgage with the same terms and conditions.
• Creditor subrogation: This involves changing the financial institution that holds the mortgage. The borrower transfers their mortgage to a different bank that offers more favourable conditions, such as a lower interest rate or reduced fees.

17. Grace Period

A grace period in a mortgage loan (carencia) is a time frame during which the borrower is not required to repay the principal amount, though they typically continue to pay interest. During this period, the principal balance remains unchanged since the monthly payments cover only the interest accrued.

Grace periods are often used to provide financial flexibility at the start of the loan or in exceptional circumstances where temporary financial relief is needed.

There are two types of grace periods in a mortgage:

• Total grace period: During this period, the borrower pays neither principal nor interest. At the end of the grace period, the debt is recalculated, and subsequent instalments are usually higher to make up for the missed payments.
• Partial grace period: In this case, the borrower only pays interest, while the principal remains unchanged. This reduces the financial burden temporarily, but the borrower will likely face higher repayments or an extended mortgage term later on.

Once the grace period is over, the borrower must resume paying their instalments as usual until the entire principal and any remaining unpaid interest have been fully repaid.

Understanding these concepts can make all the difference when applying for a mortgage. Being well-informed will help you evaluate your options more effectively and find the mortgage that best suits your needs and financial situation. Remember to carefully review the terms of your contract and seek professional advice if necessary. Now that you have broadened your knowledge of mortgages, you can start looking for your ideal property.