Save for years. Ask the family for help. Pawn small treasures kept in the closet. And yet, the savings account is still far from reaching the money needed to buy a home. This is the harsh reality of many young people who dream of buying a house, but encounter exorbitant prices in big cities. Faced with this situation, some have resorted to a dangerous strategy to raise the money: request a personal loan before signing the mortgage.
“Some entities may be inciting clients to go into debt, but it is bad practice. The managers who promote this practice are trying to circumvent the risk systems that we have in the entities, and that can lead a client to a very delicate financial situation,” says a senior manager of a Spanish bank.
Generally, Entities only grant mortgages for up to 80% of the value of the home, which forces the client to cover not only the remaining 20%, but also the associated expenses (notary, taxes, registration). In Madrid, for example, for an apartment worth 300,000 euros, it implies having at least 90,000 saved. Unable to assume this figure, some resort to personal loans to cover the deficit. In reality, it is a covert overfinancing, which is seen as imprudent by the banks themselves, since it considerably increases the risk of non-payment, and inadvisable for clients due to over-indebtedness that can lead to ruin.
“You can see, there is a lot of background noise. But it is a dangerous and very risky practice, because a mortgage is a considerable credit that is added to a consumer loan. And we see that some clients are looking for other alternatives. It is a question to be resolved, because It all starts from the fact that people cannot generate that 20% or 30% that you need to have saved,” say sources from the financial consumer association Asufin.
The banks are obliged to grant responsible loans and must evaluate the creditworthiness of clients to be sure that they can pay the installments throughout the life of the loan. To do this, the risk departments carry out a solvency test, analyzing income, expenses and credit history. This is a measure to avoid defaults and over-indebtedness. But some customers have found a blind spot in the system.
When someone requests a loan, the information is recorded in the Risk Information Center of the Bank of Spain (CIRBE), a database which collects information on the loans that each entity has granted to clients and that any bank can consult. It is the way that the entity has to have all the data and evaluate if someone can request an additional loan and assume the installments without entering into financial overexertion. However, the database is not updated immediately.
If a client requests a loan today, The bank has until the 5th of next month to send the data to the CIRBE. And in turn, these data are not fully updated until the 19th, according to sources from the Bank of Spain. This allows clients to have up to a month of grace to first request a personal loan and then the mortgage, temporarily avoiding risk controls.
Banks are aware of this practice and disapprove of it. They consider that these are specific cases and more related to the commercial incentives of some managers. “To carry out these practices, it is very difficult for clients to do it alone. Normally, signing a mortgage takes around two months from when the procedures begin and it is very difficult for a client alone to know how to play with the deadlines, because the bank also carries out several solvency checks throughout the process to verify that The situation has not changed,” explain banking sources. Likewise, from the Bank of Spain reminds that the code of good practices and responsible credit also implies that the client must provide all their true information. “It is a commitment from both parties, the bank and the client,” they point out.
Unsustainable debt
From banks, regulators and consumer associations, the warning is clear: trying to obtain a mortgage at any price can lead to financial ruin. The risks of over-indebtedness are evident when combining a personal loan with a mortgage. To give an example, requesting a personal loan of 30,000 euros at 8% APR (the current average price) to be repaid in five years means facing a monthly payment of 608 euros. If we add to this a 30-year mortgage of 200,000 euros, with a fixed rate of 2.5%, the monthly payment would rise to 790 euros. The result: a total burden close to 1,400 euros per month in debt alone. This represents an unaffordable outlay for many. Considering that the average salary in Spain in 2023 was around 1,900 euros net per month, it would absorb 74% of the income of an average worker.
Although it is often said that Banks do not approve mortgages if the financial effort (the part of the income allocated to paying the installment) exceeds 40%, In practice, entities have tightened this limit, currently applying a maximum threshold of 30% to guarantee the financial viability of the client, as detailed by the entities consulted. It is an additional security measure.
Over the last two years, banks have adopted an increasingly cautious stance in granting mortgages. The combination of high interest rates and rising prices has forced entities to exercise extreme caution, tightening the solvency criteria of potential clients. The European Central Bank (ECB) itself This has been confirmed in the loan survey which is published quarterly and which reflects that the increase in requirements has been general in Europe, but especially intense in Spain.
To alleviate the difficulties faced by young people when purchasing a home, The Government and the banking sector have launched a plan that seeks to facilitate access to mortgageseven without having the necessary initial savings. Through the Official Credit Institute (ICO), a guarantee program is offered that covers up to 20% of the value of the house. This is not a subsidy or an additional loan, the client must pay the entire credit. But this state support allows banks to finance more than 80% of the price of the property, since the State undertakes to assume that 20% in the event of non-payment, so that the prior savings needed is lower.
However, the program is subject to limits: The maximum price of housing varies between 200,000 euros in regions such as Extremadura and 325,000 euros in Madrid, and it is aimed at those under 36 years of age, so not everyone can qualify. Some of them, suffocated by the situation, have begun to explore ill-advised ways to achieve their goal, but resorting to financial traps can lead to unsustainable debt that ruins their financial stability for life.
