The current economic situation and the change in housing demands have made the desire for replacement housing the main driver of the residential market in Spain at the moment.

The main reason is that many young people, potential buyers of a first property in ownership, have seen in recent months how their personal finances have deteriorated in the face of the uncertainty caused by the pandemic and, on the other hand, many homeowners, as a result of the confinement and the foreseeable change of prices in the property market, have thrown themselves into the search for a new home that better suits their needs.

Carrying out a transaction of this type is not a simple decision and there are also financial risks, as this process will be defined by the sale of the first property, the change or contracting of a new mortgage, some additional costs, etc.

Given that these buyers know perfectly well what to take into account when buying a new property, attention should be focused on the sale of their first home. It is necessary to know beforehand what steps have to be taken, what possibilities exist at the time of the transfer or what costs will have to be taken on.

What is the current situation of the real estate market?

It is important to know the price range and sale time frames corresponding to the neighbourhood of the house to be sold. It is also recommended to study the market forecast of the value of the properties for the next few months (in case it is convenient to wait), as well as to consider the possibility of including in the search for a new home those locations that are in a process of expansion. Although they are not currently very attractive, they offer the opportunity to buy at a good price, allowing you to obtain a greater benefit during the process, as the profits from the sale of the previous property will be higher than the price of the new purchase. Not to mention that, over time, this new home will increase in value because it is located in a developing location.

How can I sell my house if I’m still paying off my mortgage?

In this case, it is best to sell first, cancel the debt and apply for a new mortgage loan to cover the purchase of the new home. If you have the necessary purchasing power, you also have the option of applying for a new mortgage and taking over both at the same time until the sale is completed. Another possibility is to take out what is known as a “bridge mortgage”, a mortgage loan that allows you to move from one property to another without having sold the previous one and without the need for savings. Finally, there is the alternative of negotiating a subrogation with the bank, whereby the mortgage on that property will be in the name of the new owner.

I don’t have a mortgage: should I sell first or wait until I have found your new home?

The ideal choice is to do everything at once. That is, finding the right buyer and finding the ideal home to buy, all at the same time. To achieve this, you can try to agree on the final closing of the sale within a certain period of time in the deposit contract. It is recommended that you request a period of 4 or 6 months, in this way, you will have the peace of mind of having found a buyer and will have enough time to locate the suitable home and carry out some type of reform if necessary. If this is not possible and you have enough savings to pay for the new purchase (i.e. 20% of the property price + 10% of the expenses), you can apply for a mortgage loan and, once the sale of the current home has been completed, settle the debt.

How should I plan the sale of the property

Selling a property requires organization. This includes factors such as:

• Finding a good intermediary to help and advise you during the process
• Carrying out possible reforms or repairs that help to revalue the property
• Gathering all the information and documentation that may be requested by interested parties
• Taking good photographs of the house
• Correctly valuing the property

How will the sale of the home affect the income tax return?

As this is a case of reinvestment in the primary residence and since all, or part, of the money obtained from the sale of the habitual residence is used to buy a new home, you will be exempt from paying sales tax, provided that the total amount obtained from the transfer is reinvested in the purchase of the new property.

If the amount reinvested in the purchase is less than that obtained in the sale, only the proportional part of the profit obtained that corresponds to the amount used for the purchase of the new home will be excluded from taxation.

What other expenses are involved in selling a property to buy another one?

Besides the sales tax, there are other expenses that should be taken into account before starting the process:

• Municipal Capital Gains Tax (this depends on each local council and is calculated based on the increase in the value of the property during the time that you have been its owner),
• Costs of the deed of sale when selling the property,
• Costs arising from the possible settlement of the mortgage in progress,
• Property commission (if applicable),
• Expenses resulting from the request for certificates or information relating to the home to be sold,
• Expenses resulting from the purchase of the new home,
• Transfer taxes on the purchase (AJD, VAT or ITP),
• Possible need to constitute a new mortgage,
• Moving expenses

In order not to make any mistakes during the process, it is best to consult a real estate expert who will give good advice and provide enough information to settle the sale and purchase successfully. This is especially important in cases where you have an urgent need to change your property.

Should you require any assistance or legal counsel concerning properties, purchases and sales on the islands of Mallorca, Menorca and Ibiza, please contact us at your convenience at info@mallorcasolicitors.co.uk or by phone on the numbers listed on our contact page.