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The 3 secrets to decide on mortgage financing

Los 3 secretos para decidir sobre la financiación hipotecaria

Last week a friend hired us to provide him with a Real Estate Personal Shopper, service, more precisely a real estate investment consultancy. During the first meeting he asked us:


– Do I buy cash or use a mortgage loan? My bank has already offered it to me.


We know that investing now in real estate in Spain using mortgage financing  intelligently is more profitable. That is why we told our client that we would analyze the different possible financing percentages so that he could make the best decisions. We would analyze the numbers.

He agreed and thanked us for the work.


Due to privacy policies, we will not reveal the actual calculations obtained for our client, but the results shown here are based on the case study of the fourth floor without an elevator in Madrid. In this article you can see the data and assumptions used for this analysis.


We study 5 cases of financing percentages: 40%, 54%, 60%, 70% and 80%, the latter being the maximum granted by financing entities in Spain.


To calculate profitability, we take into account its 3 fundamental factors:

1. The discount that can be obtained at the time of purchase of the property with respect to the market value.
2. The rent return.
3. The ability and assertiveness of predicting the market value trend of a given property bytype and category, ethat is, its appreciation.


In terms of net rental profitability, we obtained the following results:

From Graph 1, we can see how when the interest rate is very low, the returns obtained are similar at any level of financing. When the interest begins to rise, greater and greater differences begin to be noticed: the higher the financing percentage, the lower returns are obtained as the interest rate increases.


Regarding the net appreciation return, we obtained the following:

Graph 2 shows how at low interest rates, the highest level of financing is more profitable. Here it is important to make a clarification, since in this case study an increase in the market value of the property of 3% per year was obtained for 5 consecutive years. For this reason, this higher yield is observed with greater financing. Because a return is being obtained on money that we did not have, which we leveraged..


In terms of total net return, we obtained the following:

Once we met again with our friend and client, we came to the following conclusions:


  1. As long as we buy below the market value, we will ensure a positive return and can use a higher level of leverage.
  2. Asking for more financing generates more total return in the event of a market uptrend. But it is more risky in case the price does not rise as expected.
  3. Depending on the property and the needs of the investor, it is possible to opt for a tourist rental to improve rental profitability (for example, if you are looking to generate more monthly income).


Finally, together with our client, we have decided not to exceed a 40% to 50% financing percentage for this investment. It offers us a very good performance and less risk.


We hope that our study has been of your use and interest.


We are interested in knowing your opinion, either as a private investor or as a professional. What percentage of financing have you used successfully in your real estate investments? In what context?


Thank you very much for reading us.


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