Taking over a mortgage is usually the best option

When purchasing a property, always find out if the current owner has a mortgage which you can take over, instead of signing a new one. You will usually save quite a bit on taxes…

The situation

Imagine you are about to sign the deal on a property purchase, and need finance. Before starting your search with credit entities, find out if the current owner has a mortgage on the property that suits your needs. If so, you can usually subrogate the mortgage, subject to the approval of the mortgage holder, in a process known as subrogación in Spanish.

The advantages

Upon the issuing of a mortgage, a regional tax known as the Impuestos sobre Actos Jurídicos Documentados (AJD) is due. This is applied to the value on the notarial documents issued, in our case for the issuing of the mortgage.

The tax level to pay varies depends upon your circumstances, but is between 0.1% and 1.5% of the secured capital. The law considers the «secured capital» in this case to consist of the capital of the mortgage plus three year’s interest.

The loophole…

If you take over the mortgage which is already on the property, then the act of transmitting the mortgage to you is exempt from the AJD tax. Spanish banks are usually quite happy to subrogate the mortgage as long as you meet their lending criteria. But if you take out a new mortgage, then you have to pay AJD.

What if I need to change the conditions?

If you need to change any conditions of the mortgage terms – say you need to increase the capital, or change repayments – you can negotiate this with the mortgage holder before subrogation takes places.

The following two modifications are currently granted exemption from AJD:

  • If you change the conditions governing the interest rate
  • If you modify the final repayment date (ie if you extend the mortgage in order to lower monthly repayments)

If you need to increase the loan amount – because the mortgage isn’t enough for you to purchase the property and you need additional funds – then this can also be negotiated with the mortgage holder. AJD is due in this case, but only upon the additional funds granted.

Beware the valuation trap!

If you ask for an increase in capital, take care with any valuation (tasación) issued by the bank.

If the valuation is only used to verify that the value of the property has not dropped below the mortgage issuer’s criteria, then there will be no fiscal repercussion.

But, if the valuation is used to modify the original mortgage (which in turns modifies the supposed auction price of the property) then the tax office will consider that a base modification of the mortgage has been carried out and will demand a new AJD payment for the entire base capital of the mortgage.

Cervantes Alarcón Consulting can always help with property purchases and the negotiation of finance in Spain. Contact us today to see how we can help – this article is just one of the many tricks of the trade we know and apply to save our customers money!

Maria Luisa

María Luisa Cervantes is a chartered accountant who graduated from the University of Granada in 2002. Founder of Cervantes Alarcón Consulting, she is an experienced accountant and financial advisor who is a member of the Almería guild of economists. With more than 15 years of experience in business administration and international trade, she is also a subject matter expert in the UK - Spanish bilateral agreements which cover the rights of expats to live, work and retire in Spain.