Mortgage booby-trap when prices fall 20pc or more

Not a lot of people know that if you buy a property in Spain with a mortgage, and the property then depreciates in value by 20% or more, your lender can force you to stump up more collateral to guarantee the loan, even if you are up to date with your payments. With Spanish property prices deflating fast, this is suddenly a potential issue for Spanish property investors.

Another malicious clause in the small print of the typical mortgage contract? Nope. This time it’s actually on the Spanish statute books, in the mortgage law of 1981, reaffirmed in a royal decree earlier this month. The law says that lenders can demand “additional guarantees” when the value of the collateral – the property – falls by 20% or more.

Property values have never fallen like this in Spain before, so a law that might have seemed harmless in the past, when falling prices seemed to be out of the question, is now making some borrowers nervous.

“The majority of properties bought 2 or 3 years ago are now probably worth 20% less than they were at the time of purchase,” says one expert, quoted in the Spanish press.

Fortunately, mortgage lenders do not really have an incentive to demand that the law is enforced. “If people are paying on time I doubt that lenders will be interested in doing something like that,” says the expert.

Furthermore, like many daft laws, it is highly ambiguous, and lenders would not have an easy time implementing it. “As well as being highly unpopular, there are lots of ways people could fight it in court,” explains an expert. “For example, they could argue it is the banks fault for over-valuing the property when they granted the mortgage.”

So, just a theoretical risk perhaps, but still one worth knowing about.

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