You want to buy a villa in Spain? Whether Mallorca, Marbella or Ibiza, the conditions for real estate financing differ significantly. If you do not buy your villa for 100% personal use, but rent the villa partially or even completely as an investment, then you should know the special conditions in Spain. In addition, I also give you a few insights from the USA, as a comparison. So you can see how cheap a financing in the home country and how expensive loans as a foreigner in other countries become, in relation to your interest rate and your equity. In the end, it’s always about return on investment.
Return leverage: equity and interest
The biggest levers within the return are 1) equity share, 2) interest rate and 3) fixed interest period. The “higher the costs” the worse the return.
A complementary guide to buying and renting a villa.
What does yield mean?
Return, simply put, compares your capital investment to what you earn from your property (renting). If the return (income / investment) is 6% or more annually, your villa is generating enough for the tenant(s) to pay for your villa.
Negative return effects due to interest rate & Co.
The higher the monthly costs (repayment, interest and maintenance), the lower the return. So if the interest rate you have to pay for a loan increases, this has a negative impact on the return.
Negative effects at a glance:
- Equity investment
It’s the same with equity, of course. Because, as you will learn in a moment, you have to provide significantly more equity as collateral abroad. The more equity you have to provide, the more assets are tied up in your property.
Rentals and extras in the south: pool, garden & co.
In addition, there are the typical maintenance costs, of course extended and aspects such as garden service and pool service. For example, if you use your villa only 2, 3 or 4 months a year yourself and rent it out the other time.
Learn here everything first and important about financing a villa in Spain.
Equity investment abroad: Spain
The use of equity capital differs considerably abroad. The main reason for this is that, in case of doubt (default), banks can only access the property with increased effort. Accordingly, German banks rarely finance foreign real estate and refer you to a local partner.
Equity comparison: Germany, Spain and USA
For a real estate financing in Germany you need, for the first, second and also third real estate about 15% equity.
In Spain, whether Mallorca, Ibiza, Marbella or other hotspots, the bank charges significantly more, usually 50-60%.
- Equity in Germany: 10-15
- Equity in Spain: 50-60%
- Equity in USA: 100%
If you want to buy your property in the USA, you have to expect even more. Often you even have to buy with 100%. Why is that?
Security, access and legal systems
As already described in the introduction: Equity serves as collateral for the bank. The more “risky” the loan, the worse the conditions. In this country, a good credit rating is sufficient to obtain the usual conditions of 10-15%. Abroad, many factors are added, for example, the legal system. Within Europe, or the European community, it is still a little easier than with third countries, such as the USA.
- Interest rate
- Fixed-interest period
- Equity share
Interest rate and fixed interest rate
Interest rate and fixed interest rate – The fact is, as a foreigner you get worse conditions in other countries, after all the risk increases. Interest rates, or higher interest rates, have an extreme effect on profitability.
Interest effect: cost increase at only 1% plus
Let’s say you borrow 500,000 euros as a loan for financing. Every year (every month) you pay off a little of the loan amount. The smaller this remaining debt, the smaller the amount you pay for interest.
Interest rate example in 1st year:
- 500.000 Euro at 1% pa. = 5.000 Euro / 1st year
- 500.000 Euro at 2% pa. = 10.000 Euro / 1st year
Remaining debt and interest calculation p.a. (per year)
Let’s say that after year 1 you have repaid 5% of the loan amount, i.e. 25,000 euros. This leaves a remaining loan of 475,000 euros. The basis for the interest calculation in the following year.
Interest rate example in the 2nd year:
- 475.000 Euro at 1% pa. = 4.750 Euro / 2nd year
- 475.000 Euro at 2% pa. = 9.500 Euro / 2nd year
Conclusion: 1% more interest adds up
The difference adds up with each year your loan runs.
- 1st + 2nd year at 1% pa = 9,750 euros interest
- 1st + 2nd year at 2% pa. = 19,500 euros interest
Fixed interest rate briefly explained
At 5% repayment pa. you assume (without unscheduled repayment) a loan with a term of 20 years. This is where the fixed interest rate comes into play.
That is why the fixed interest rate (borrowing rate) is so important. Here, the interest rate is fixed for period X and remains unchanged within the period. After X years, you then have to look for follow-up financing.
So you know more about the required equity, repayment and your interest block. On the subject of maintenance of villas, in countries like Spain, I have written an extra guide.
Negative effects at a glance:
- Equity investment
- Maintenance – more in the guidebook:
Buy and rent villa abroad
Yield, season, service charges, renovation, financing… Villa buy and rent – A popular model among many owners, especially villas located in places where others go on vacation. For example, Spain as a hotspot, especially Mallorca, Ibiza but also Marbella, depending on the personal ties you have to one of the places.
Who wants to rent out his villa, buys not only for personal use, but also classically as an investment with the goal that the property generates income. So much (yield) that the costs are covered (loan repayment, interest and maintenance of the villa). Learn here everything you need to know about the return on investment, the seasonal rental of a villa, your utilities from maintenance to pool service and facts about financing. Also, the Spanish property tax when buying real estate.
Real estate agents: Villa Portfolio Ibiza, Mallorca & Marbella
As a real estate agent I am on canvassing for clients, we provide exposés, schedule viewings and help with the buying process on site, from notary to financing if needed. A small selection and choice of my villas in Mallorca, Marbella and also Ibiza, you can find here: