Since the 1st of January, in most parts of Western Europe, a system of fixed exchange rates has been established. The parities for the exchange rates of 11 Western European currencies were fixed between each other and towards the Euro (see graphics). This measure is the last preliminary stage to the European Currency Union, which will be concluded with the introduction of the Euro as the only valid currency in the participating countries, on the 1st of January of 2002.


The following advantages for purchasing and selling real property result from this system of fixed exchange rates: First, banks can no longer charge commissions on money transfers for the conversion of the exchange rate of the currencies that have joined the European Currency Union; second, due to the fixed exchange rates, any currency risk related to the respective currencies can be excluded from the beginning.

However, concerning the purchase of properties, there is something more important than the aspect of transactions, which is the answer to the question on the manner of financing. Depending on the available liquid means, in an extreme case, a property can be financed with up to 100% of own capital. However, in many cases, part of the purchase price is co-financed with a mortgage loan by a bank. According to the reliability of the client, Spanish banks offer a financing of up to 80% of the value of the property that was established by a certified expert opinion. But taking up a mortgage loan could make sense even if the purchaser were able to finance the property completely by own capital. The public promotion program for foreign house owners who live and are taxable in Spain provides considerable tax benefits.

When taking up a mortgage loan, the main question that arises is about the payment of interest. Credit institutes offer mortgage loans with both fixed and variable interest rates. A mortgage at fixed interest rate has the advantage of security in the calculation, as the repayment instalments do not change during the whole financing period. The disadvantage is, that mortgages at fixed interest rate are usually more expensive than mortgages at variable interest rate, at least in the beginning. Furthermore, fixed interest rates are only offered for up to 10 years, in some extraordinary cases up to 15 years, whereas variable interest rates can be established for up to 30 year periods. At the end of November 1999, the Deutsche Bank in Spain has offered a mortgage at fixed interest rate with a maximum life of 10 years, at a nominal interest rate of 7%. At the same time, a commitment at variable interests was offered with 4,25% in the first year. Unlike mortgages at fixed interest rate, mortgages at variable interest rate are always affected by the risk of a change of the interest rates. This risk becomes acute, if the market interests increase during the repayment period. This is why the level of credit instalments cannot be exactly calculated Click here for footnote over the whole life of the credit. Especially when you have a long term credit, mortgages at variable interest rate imply a high insecurity in the calculation.

If you choose a variable interest rate, in any case you should take into account which reference interest rate the variable interest is based upon. For this purpose, most Spanish banks use the EURIBOR for 1 year (EURIBOR = Euro Interbank Offered Rate). The EURIBOR for 1 year is an interest rate, which the most active European merchant banks have agreed upon, in order to lend each other money at a certain time, for the life of one year. However, some Spanish credit institutions use other reference interest rates, that are mostly higher than the EURIBOR (Example: the reference interest rate of the Savings Banks CECA). The reference interest rate for a mortgage at variable interest rate is normally fixed at the beginning of the year, and subsequently applies for the whole year. The price of a building financing at variable interest rates results from the formula reference interest rate + margin. The margin includes the cost for administration as well as the share in profits of the credit institution. Usually, margins of between 1 and 1.5 per cent are agreed upon.

Finally it should be noted that in many cases, the credit institutions, besides the interest agreed upon, do charge an opening or maintenance fee of up to 2% of the amount of the loan. Moreover, in case of premature repayment or redemption of the mortgage loan, usually a pre-maturity compensation fee is charged, which can amount to up to 3%. So it is recommendable, when comparing different offers for building financing, not to consider the nominal interest, but the effective annual interest rate (T.A.E.) as a quantity for orientation. Unlike the nominal interest rate, the effective annual interest rate includes both the compound interest effect as well as any established commissions.

Uwe Wegener
(Deutsche Bank -Private Banking)
For further information please phone 95 281 20 35.

The price difference between a mortgage at fixed interests and a mortgage at variable interests is determined firstly by the interaction of its life and the respective expectations on the interest level, and secondly by the premium for the cession of the risk of interest changes charged by the bank. A mortgage at fixed interests becomes expensive, if credit institutions expect an increase of the market interests during the life of the credit. On the other hand, if the credit institutions expect a decrease of the market interests during this period, there is the theoretic possibility that a mortgage at fixed interests can be obtained cheaper than a mortgage at variable interests. However, due to the premium, which the client has to pay to his bank for the cession of the risk of interest changes, when he takes up a mortgage at fixed interests, normally this kind of commitments is not cheaper than a mortgage at variable interests, even if a decrease of the market interests is expected.