This week has seen the markets in turmoil.

The downgrading of a number of Spanish Banks, Spain itself and the previous weeks downgrading of a number of UK Banks who lend in Spain has seen a very quick increase in margins across the board.

Even Banks like Barclays who missed the downgrades this time round have increased their variable non resident rate from 1.95% to 2.35%.

By far the biggest impact on the Spanish market of the downgrades as it relates to foreign buyers is Lloyds moving minimum margins from 1.5% to 3%. As the last interest only lender to gain 5 years interest only with Lloyds now costs a massive 3.80% above Euribor.

Changes are immediate with only full applications received in full by 21st October having the old rates held.

Against this backdrop the good news seems to be that for their own stock Spanish Banks are absorbing increases in costs.

Banco Popular will offer 0.25% above Euribor for first year followed by 0.50% and Sol Bank are offering 0.60%. With funding up to 100% available at such keen rates Bank owned property is looking good to offer on. Yearly interest costs from the normal 4% Sol Bank rate to their bank owned rate means for every 100k you borrow you save € 1.344 per year in interest payments.

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Following the general trend we have seen over the past few months Deutchse bank announced today that their margins above Euribor for non-resident buyers has increased from a minimum of 1.25% above with linked products to 1.80% with linked products and as high as 2.60% above without linked products.

How long it will be before the last lender at 1.25% Sol Bank hold this margin remains to be seen but we anticipate some movement upwards in the next few weeks.

This continuing trend is in danger of dampening demand. Foreign buyers have found it increasingly difficult to borrow at home by way of release of equity against their assets there as banks in other countries withdraw product for this type of loan at the same time as Spanish Mortgages become less and less attractive on rate.

We appear to be in a cycle of catch 22; demand being dampened resulting in no growth. No growth resulting in lower credit ratings for bank and Spain itself consequence of high cost if funds meaning increases in mortgage margins to make lending cost effective.

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In a recent statement the owners of Santander the Botin’s outlined their expectation that arrears in Spain had peaked and they expected matters and prices to improve this year.

The rather optimistic view is at odds with what is happening to other banks and their view of the market.

It is difficult to see how arrears in Spain; particularly for a bank like Santander who lent predominately to the resident market; will actually drop over coming months.

Unemployment all be it predominately for the younger generation is at 21%. Most businesses particularly those in the financial sector expect to retrench rather than employ this year as mergers between Caja’s gather pace and look to list. They require cost savings to make these attractive to investors and the bulk of this will come from efficiencies and economies of scale. The firms looking to shed jobs this year will not affect those at the beginning of their careers but will affect the 40 plus in a way perhaps not seen in Spain before.

The people who will be affected by companies cost cuttings are those with mortgages and this year we will see more of these types of cuts than previous ones.

Euribor rates which hit an all time low last year and have shielded mortgagees for the last 12 months with overall rates of anything as low as 1.5% have steadily risen. This month for reviews and new loans the 12 month Euribor is 2.08%. Even if the loan was secured at a very low margin above this year most mortgagees will be hit by a minimum 1% increase in their rate. For a mortgage of 100k on a 25 year term this equates to an extra € 376 per month the household will have to find. 12 Euribor rates are expected to continue to climb so by end of year mortgage reviews we could see increases as high as 2% or more to overall rate.

Spain has no control over these rate rises so has to live with a stagnant economy and rising household costs.

Given this environment it is difficult to see the Botin’s predictions of a stabilising arrears book and improving property prices actually be realistic this year.

Most pundit would predict 2011 will continue to see arrears rising and prices in some areas continuing to fall as banks make efforts to clear the vast numbers of surplus stock.

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A Place in the Sun reports today that sales for Spanish properties in April fell to their lowest level since the crisis began. Sales were 32% down year on year and 25% lower than March this year. Whilst most agents are reporting higher sales to the non resident market the resident market is slow due to economic situation and the pulling forward of buying decisions last year to beat the removal of tax relief being applicable on the interest of loans.

Price are expected to continue to fall and it is difficult to see in some areas prices bottoming out before the end of this year or next although in some areas demand remains reasonably high.

Banks will continue to be cautious about the granting of mortgages in a declining sales and price market so we expect no relaxation of criteria or enhancement of loan to values to happen during 2011.

Clients requiring above 60% to 70% will need to focus their searches on bank owned property.

There continues to be pressure on cost of funds for the bank and last month for the first month in many borrowing from the Central Bank by Spanish Banks increased as money markets contracted for them.

The price of funds is reflected in the mortgage pricing banks are offering.

Deutsche Bank increased their margin from 1.15% this month to 1.5% above Euribor. Lloyds did the same a couple of months ago.

Many banks have now removed the ability to take a mortgage without life cover at higher rates and instead insist life cover is taken full stop. This is to ensure profitability of lending. Many banks like Sol Bank, and La Caixa now add a lump sum life cover to loan to prevent the life cover being cancelled at a later date.

Barclays and Lloyds remain the only two banks with some products where life cover is not compulsory. The Spanish Banks still lack transparency in ensuring clients understand the linked products when quoting and it is not uncommon for brokers to forget to tell clients either.

No longer can headline rates be taken as the true cost and clients should always ask the question, is life cover required, and what would be the cost. For clients age 45 years and younger, life cover premiums are reasonable, but for client 45 years and older there is a very strong argument for taking a higher rate from one of the banks that does not have life cover than a lower rate with one that does. Finding all this out at Notary on day of signing rather than being clear beforehand may make it all too late to change and could put deposits at risk.

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