Spanish consumer groups yesterday turned on the Bank of Spain (BoS) for defending mortgage lenders who use “floors” to deny borrowers the full benefit of lower base rates. The outcry follows a new report from the BoS arguing that that the use of floors, which are often buried in the small print, is not unfair.
A “floor” is a mortgage clause setting a lower limit for interest rates on variable rate mortgages, in the same way that a “collar” sets the upper limit. With base rates and Euribor at all-time lows, floors buried in the small print have kicked in, to the surprise of many borrowers. Consumer groups have long complained that borrowers rarely gain from collars, but often lose out to floors.
The consumer group Adicae, representing the retail clients of financial institutions, estimates that more than 1.5 million Spanish mortgage borrowers have lost out to the tune of “as much as 6,000 Euros per year.” Adicae describe the BOS’s support for floors as “cynical” and “unacceptable” and the Banks position as “contradictory”.
Needless to say, in a low interest rate environment like today, floors are great news for lenders, who can borrow money cheaply without passing the savings on to their clients. That helps them rebuild their balance sheets at the expense of their clients. The BoS says this is not unfair.