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Why it is not advisable to finance the purchase of a property in cash

Firstly, it is really important for any financial adviser not to encourage their clients to take a credit commitment that they simply do not not need or want. At the end of the day, there is interest to pay and nobody wants extra debt. However, whether it’s better to take a mortgage or purchase a property in cash depends on various factors and individual circumstances. We’ve put together some reasons why some people might choose to take a mortgage instead of buying a property outright:

Liquidity Management: Using a mortgage allows you to keep more cash on hand. This can be beneficial for emergencies, investments or other opportunities/life events that may arise. If you tie up a significant amount of your wealth in a property, it can limit your flexibility. This first point is really key here when considering a mortgage in Spain because it is very difficult to release equity from the property in the future. This differs greatly from the flexibility in other countries. 

Investment Opportunities: If you believe you can earn a higher return on your money through investments than the interest rate on the mortgage, it might make sense to take a mortgage. This is especially true if mortgage interest rates are low.

Tax Benefits: In Spain, having a mortgage on the property can allow property owners to benefit from a wealth tax perspective, which can result in significant tax savings for homeowners. If the tax benefits outweigh the cost of the mortgage interest, it may make sense to finance the property.

Inflation Hedge: Real estate is often considered a hedge against inflation. If the value of the property appreciates over time, you could potentially benefit from the increase in value while paying back the mortgage with less valuable currency.

Diversification: Putting all your money into a single asset, such as a property, can be risky. Mortgaging a property allows you to diversify your investments, spreading your wealth across different asset classes.

Purchasing Multiple Properties: Another advantage of opting for a mortgage in Spain is the ability to diversify your real estate portfolio by purchasing multiple properties. Instead of investing all your available cash in a single property, you can split the deposit between two or more purchases.

Property Appraisals: More often than not, if you buy cash, you dont request a property appraisal/valuation done as this is insisted upon by the mortgage department of the bank. Property valuations in Spain are important for several reasons.

-Pricing accuracy and purchase price negotiations

-Accurate purchase tax, IBI costings and insurance costings

-Aids lawyers with the correct property boundaries and planning permissions especially if there have been any changes to the land and buildings.

Of course valuation reports can be instructed if the property is bought cash but in my experience, this step is skipped if a property is purchased without a mortgage.

The decision often depends on individual financial goals, risk tolerance and the prevailing economic and real estate conditions. It’s essential to carefully evaluate your financial situation and consider consulting with us, lawyers and tax specialists before making such a significant decision.

Martine Newman Mortgage Adviser

Martine has worked in financial services for over twenty years for finance houses such as Lloyds, Merrill Lynch and Deutsche bank. She took a break to work as an Executive Assistant to the VP of a helicopter air ambulance service in Canada for five years!

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Mortgages taken out in currencies other than the currency in which you earn are considered Foreign Currency Mortgages. Changes in the exchange rate may therefore increase the equivalent value of your debt. Under the Mortgage Law 5/2019 banks in Spain have introduced mechanisms to protect consumers from exchange-rate risk. For more information, please speak to your broker.

Mortgage Direct, S.L. is a company registered in the Registro de Intermediarios de Crédito Inmobiliario del BdE with the nº D108.

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