How Banks Are Making it Tough to Get a Mortgage in Spain: Hardening Criteria and Rejections

Teba has a partner and between the two of them they have an income of 2,500 euros. However, the couple is dragging a car loan that she is still paying off and financial institutions see this as almost a red line for granting a mortgage. At first they were told that he had to ask for it by himself; okay, they said.

They already had the apartment chosen, on the outskirts of Móstoles (Madrid), and they needed the credit to be 85,000 euros. The young man provided all the documentation, and even entered the first home program of the Community of Madrid. The Administration accepted it.

The fee that came out to pay was 320 euros per month, which meant a financial effort of less than 25% of his solo income, an amount within the healthy range. Mixed mortgage because “the fixed one was ruled out from the beginning,” he says. Then, the entity sent the request to the risk department and the blow came: “They considered that my profession is not safe.”

This young man was surprised by the rejection. And not only that. “It was a mixture of disappointment, anger and helplessness,” he recounts. In his case, he had been coping with a rent of 700 euros on his own for years without problems, without being delinquent, which is more than double what he would pay with the mortgage he requested. “It makes you angry that he was able to afford a much higher rent to spare. You feel impotent because there is no way, they tell young people that we live at home with our parents because we want to and when we try to become independent they reject us », he says.

increasingly affected

This is just one example of many among those who see how the bank closes the doors to credit despite being solvent and having no apparent problems. A situation that affects more and more people in Spain and to which the financial intermediation network Finanzate puts figures after having carried out a study: «During the first quarter of the year, on the granting of mortgages by the main financial entities in Spain , more than 30% of the loans requested by individuals were denied. This is a figure higher than that registered in 2022, the main reason for which is the tightening of the conditions that banks demand today to obtain a mortgage».

The reasons in detail that the entities allege to refuse to give these loans are varied, and it is not only one factor but in some cases several converge. In the first place, due to a poor credit history: “68% of the rejected mortgages argue this reason.”

In second place is having insufficient income: “31% of the cases of rejection are concentrated on this reason.” And in third place, with 22%, appears to have a high pre-existing financial burden. In fourth position, the reason given to Raúl Teba for denying him credit appears: unstable employment, or in his case what the bank considered unstable employment. “The people who suffer the most from this situation are those under 30 years of age and those over 55, which is where the greatest number of negative responses about mortgages are concentrated,” adds Finanzate.

Miquel Riera, head of mortgages at HelpMyCash, notes that now there are more rejected mortgage applications than before. And he delves into the reasons, which are several. «The main one is that mortgages have become significantly more expensive in the last year, because their interests have risen a lot. That causes fees are more expensive and that, consequently, the applicant needs to collect a higher income to face them. As not all clients can pay the monthly payments with a maximum of 35% of their income (the maximum debt allowed by most banks), there are more requests that are denied”, indicates the expert.

On the other hand, the latter emphasizes “banks’ lower risk tolerance” as a factor that explains the greater number of refusals: “As the current economic situation is unstable (rising interest rates, inflation, etc.), the entities are more demanding when studying applications. Consequently, now they only approve applications from people with proven economic stability and reject profiles that, although they may be solvent, do not have that stability: applicants with little savings, with contracts with little seniority, etc.”

Bank sources confirm that since the last quarter of 2022 there has been a general tightening in financial institutions when it comes to granting mortgage loans. The fact of not having a clear economic horizon, with the European Central Bank (ECB) raising interest rates, forces banks to be on their guard with mortgages.

In the sector they recognize that these credits continue to be attractive since they are a way to retain a customer for decades, but that not everything goes. That is why mortgages continue to be granted, but to people who would have been given credit two years ago, this would not be the case now. It is simply prudence, also pushed by the BCE and especially the Bank of Spain, which repeats that word endlessly.

The ECB acknowledges it

Likewise, the ECB itself in its last Bank Loan Survey points to the trend of hardening of criteria and the rejection of applications. “In the first quarter of 2023, banks reported a general increase in the proportion of applications rejected for all loan categories,” the document from the euro area supervisor says. “This is consistent with a further tightening of credit standards, which makes banks increasingly prone to reject loan applications,” adds the European supervisor.

The organization run by Christine Lagarde It also indicates that “in the first quarter of 2023, the criteria for granting loans and, especially, the general conditions applied to new loans would have tightened across the board for the fourth consecutive quarter.” The criteria are tougher, the conditions are worse and there are more and more applications rejected.

For her part, Laura Martínez, spokesperson for iAhorro, does not see an increase in rejected applications so much, but rather closely related factors. “We appreciate that as rates have risen, the debt ratio of up to 30-35% of client revenue has risen. There are people who a year ago were mortgaged at 1% and had no problem assuming a purchase of 300,000 euros, but now if they pay 3.5% interest, their installment is higher and their risk of indebtedness increases. There is a drop in solvent profiles that were on the limit and are now considered non-solvent », she recounts.

And what to expect in the future regarding mortgages? Riera points out that it is very likely that this trend will continue for the coming quarters: «The bank will continue to be demanding When studying mortgage applications, there will be fewer people who want to buy a home (due to the high price of both real estate and financing) and the granting of mortgages will continue to decline.