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Construction mortgages

There are many different ways to finance a construction or refurbishment project. The type of financing will depend on the status of the project and the client’s overall ambitions. These types of mortgage are very different to a standard mortgage and can include products from traditional retail banks as well as private lenders. In this article we have tried to give an overview of the main issues to be aware of but it is important to get professional advice from Mortgage Direct before embarking on such a project.

The first point to make clear is that clients need to have sufficient funds as the lender will not finance the whole project. This includes not only the down payment but also professional fees, taxes and some of the construction costs. It is also important the client has surplus funds to ensure that the ongoing costs can also be met when waiting for stage payments to be made available by the lender.

If you are lucky enough to already own a property in Spain and are only looking to finance some refurbishments, then financing is also available. The documents required by the lender will be based on how much refurbishment work the client is looking to undertake. If for example, the client is looking to do works that do not require planning permission, thenthe lender may only require quotes from a recognised building company. If the project is more extensive, then much of the information that follows in this article will apply.

Underwriting procedures

An important point that clients need to be aware of is that the banks underwriters will not underwrite applications until a valuation has been carried out, especially on construction mortgages. This is so that they are aware of the value of the plot and the project costs before they make an assessment on the financial profile of the client.  

It is therefore important, not only to have a qualified professional make a thorough assessment of the client’s financial profile but also analyse the project and valuation itself. Some banks might provide initial pre-approvals, but these are not binding.

Minimum documentation for construction and some refurbishment mortgages

Aside from the usual documents to prove affordability; lenderswill also require copies of the Proyecto de Ejecución (Project of Execution), Licencia de Obra (Building License) and the Presupuesto (Quote) from the main contractor with detailed cost breakdown, before they will underwrite the application for construction or a large renovation mortgage.

Owning the land

Clients do not need to own the land prior to going to the notary to sign the mortgage deed, although many clients purchase the land first or have owned it for some time before they apply for the mortgage, especially in the case of a refurbishment finance. Clients can purchase the land at the same time as signing for the mortgage and the banks can finance up to 50% of the cost (or value if lower) of the land at the notary and following that initial payment, the rest of the mortgage funds are released in stage payments as the build progresses. The typical amount of financing available is around 60-70% of the value of the project, which includes the land. The number of stage payments is usually agreed between the applicants and the lender. At each point when a new stage payment is due, a specialist valuer will visit the site to assess progress on the build and decide if the next payment can be released by the lender.

Final stage payment

Lenders do not provide the last stage payment until the Certificado de Fin de Obra and Cédula de Habitabilidad are available, which means the funds are not usually available before the developer requires their own final payment. At the start of the project, when deciding on the number of stage payments, it is important to realise that there may be other points in the process when the developer requires payment, but the bank is not ready to release more funds.  

There are many factors to consider when building or renovating a property in Spain and it is important to talk to an expert to understand fully the financing options before committing to the project. At Mortgage Direct, we would be happy to assist you.

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