Buying Real Estate In Mallorca - Could Financing Save You Money?

Can financing a purchase really save you money? You have 1.000.000 euros to spend on a property in Mallorca, logic would tell you that you might as well buy the property outright? Well, maybe not!

There is an annual tax in Mallorca (Majorca) for non-resident owners of real estate know as Wealth Tax. This is a small tax on the equity in the property.

Why is it charged? Well, from a fiscal point of view, the Spanish authorities see properties in Mallorca, owned by foreigners, as luxuries. Not only that, but as non-residents, there is little if any fiscal contribution: no income tax, no social security payments, no goods and services 365 days of the year thus adding to the local economy.

So, to cover this and make some kind of tax on properties that are left unoccupied for long periods of time, the Wealth Tax is levied on a sliding scale based on the equity in the property. This means that, where there is more equity, there is a larger taxable base, resulting in a higher tax bracket! Yes, the owner of a 500.000 euro apartment owned outright, will pay more Wealth Tax than the owner of a 1.000.000 euro Villa with a 700.000 euros mortgage!

So, can you really save money by taking out a mortgage? The answer is possibly, with careful investment. Wealth tax varies from 0.2% to 2.5% depending on the equity. So, if there is a cut off point where, the saving that can be made on your Wealth Tax liability is more than the interest paid on the loan and the interest received on the capital that is not invested in the property.

Lets take the 1.000.000 euro villa example. At current rates (based on figures from the Ministerio de Hacienda published in 2007) if you had 1.000.000 euros equity in the property then your annual wealth tax is about 5.490 euros. If you had 300.000 euros equity in the same property then your Wealth Tax liability would be about 822 euros a year.

So if you borrow 700.000 euros on an interest only mortgage at the current starting rate of 5.5% you would pay an annual interest of around 38.500 euros. Now, lets say, you invest the 700.000 euros that you haven't tied up in the property either in a portfolio or high interest account in the UK, then your annual interest earnings would be around 42.000 euros.

So, take the 42.000 euros that you've earned, take away the 38.500 euros that you've paid AND take away the reduced Wealth Tax burden of around 822 euros and you've actually got a balance in your favour of around 2.677 euros!

OK, so my example above is not a highly precise one. I haven't taken into account the cost of setting up the mortgage and whether there would be an overall balance in favour within 1 or 3 or however many years.

Nor does it take into account other annual running costs, but my view on that is that you would have to pay those anyway. An additional advantage is that you still have 700.000 euros equity available with which to make other investments, buy to let, being one example.

The principal however is a sound one, imagine if you could find a 10% return on the 700.000 euros not tied up in the property here, the balance in your favour would be around 30.000 euros per annum. The point is, it does sometimes pay to borrow rather than buy outright.

Sebastiaan Kemna has been in the Real Estate business in Mallorca for over 10 years and runs a very successful Estate Agency in Santa Ponsa as well as a successful property portal:

Mallorca Property and Majorca Property

As well as Custom Seek Mallorca - Search Engine

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