Why are land mortgages in Spain treated So harshly?
According to a recent article in Idealista, mortgages for land purchases are notably harder to obtain than those for buildings. They typically come with lower loan-to-value ratios, shorter repayment terms, and higher interest rates. But that defies logic.
Land is the most fundamental form of property. Geology and slope are unchanging features, whilst buildings can develop structural issues and require ongoing maintenance, inevitably deteriorating physically or by fashion. Land’s principal value is its location relative to other physical features—something that cannot be altered. What you see is what you get, and its history and composition can be researched.
Moreover, land is finite. It isn’t being manufactured, and its supply remains constant. Its value can change with planning rezoning, which usually increases its value rather than diminishes it. Like buildings, land prices fluctuate with demand, but the asset itself is enduring.
So why the poorer lending terms?
Shorter repayment periods for land seem counterintuitive. Land lasts forever; buildings do not. While structures deteriorate and depreciate without investment, land is valued in perpetuity. From a risk perspective, land should be seen as more predictable and less volatile.
Perhaps banks view land as too stable—too boring, even. Or maybe there are other factors at play that aren’t immediately obvious, such as speculation on planning use changes, but these affect building’s too. Valuers acting for the bank should take that into account, their valuations separating the core value from the speculative, higher risk element.
The banking sector’s cautious stance on land feels illogical and unreasoned; an ‘it’s always been this way’ approach. While liquidity and planning uncertainty play a role, as with all property, they don’t justify the stricter lending conditions attached to what is arguably the most stable form of real estate.
Survey Spain frequently observes through valuations and client experience, that well-located plots, especially those with clear development potential, offer strong, long-term, ‘boring’ security.
It’s not the first time we’ve questioned Banks’ lending logic, with high % of value lending at times of boom feeding that boom, and restricted % of value when the market has collapsed. https://surveyspain.com/2015/03/30/mortgage-upside-down/
