The Spanish government has announced a new mortgage law that will encourage people to switch to fixed interest rates mortgages that reduce risks for borrowers.
90% of mortgages in Spain are currently variable rate and linked to indices such as the Euribor with interest payments that go up or down during the mortgage term and account for almost €590 billion of the €646.5 billion total of new mortgage lending.
The main aim of the new law is to avoid situations where borrowers are unaware of their obligation to their mortgage provider in the future. The possibility of switching will apply both to new and current mortgages.
Euribor currently sits at -0.18% because of the European Central Bank’s monetary policy. “Interest rates are negative at the moment,” said Luis de Guindos, the Spanish Minister for Finance, “but this isn’t normal, and won’t be in a contract that spans so many years as a mortgage.”
The new law, which responds to European standards that should have been applied a year ago, states that banks cannot claim full repayment of a mortgage until default by the client reaches 2% of the total loan including interest or nine monthly payments during the first half of the loan term. In the second half of the loan term, the minimum is 4% of the loan or 12 monthly payments. The law therefore adds between six and nine months to the period from which the bank can claim repayment of a mortgage and start repossession.
Under the new law, banks cannot oblige clients to take out other products such as insurance to get a mortgage unless authorised by the Bank of Spain or of proven benefit to the consumer. This measure, which has been met by protests from the banks since it’s big business for them, allows banks to offer discounts on associated products.
Although the government says its aim is to make mortgage approvals more transparent, in reality the new regulations seek to reinforce legal guarantees for clients and banks. Sentences in both Spain and Europe against interest rate floor-clauses have hit banks hard, and led to billions of euros in compensation to clients. The new mortgage law will make it much more difficult for clients to prove that they haven’t understood the contract with their bank.
When a mortgage is approved, clients should receive two things from their bank seven days before signing: a standard form including the main characteristics of the mortgage, and another form warning that the contract contains sensitive clauses such as a base rate clause.
The information should include estimates of different interest rate scenarios, a copy of the contract and detailed figures for each payment in mortgage costs. The new law does not lay down who should pay for each cost but says that both parties should agree on this.
In the seven days prior to signing, the clients should visit their chosen notary and check that all documentation has been received on time. The notary should answer all the clients’ questions, and explain any sensitive clauses in the contract. The clients should sign a free notarised form stating that they are aware of all necessary information.