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A summary of Spain’s new mortgage act, and the obstacles it creates for borrowers from abroad

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Lawyer Raymundo Larraín briefly reviews Spain’s new Mortgage Act which came into force on the 16th of June 2019.

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By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of June 2019

So, you fancy buying a property in Spain with your partner and take out a loan? Well, you should read this post first.

The last time I wrote on this subject was last November, New Mortgage Law to be passed, and then again in May this year, Spain’s New Mortgage Law spells longer bank repossession evictions for struggling borrowers.

Spain’s new Mortgage Act brings a slew of changes that effectively change the game as we know it – moving the goal posts. For once, I am glad to report that the goal posts are actually being moved (for the most part) in benefit of consumers/borrowers, to the detriment of lenders.

The positive raft of changes comes about instigated by EU Authorities, as Spain is effectively transposing a EU Directive from 2014, which seems to have taken for ever BTW.

Whilst all the below-listed changes may sound great on paper, in practice the well-meaning intentions of EU lawmakers may create serious issues to the point of jeopardizing some property deals. The over-protective nature of some of the new requirements will likely translate into some buyers getting cold feet and pulling out, as waiting times and entry barriers have been effectively erected on lending.

As this is just a blog post, I am not going to go into detail on the new changes. I will simply collate the most important ones in bullet points for ease of comprehension.

All changes effective as from 17th June 2019.

  • Floor clauses (collar clauses) will be completely removed in all mortgage loans. For more reference: European Court of Justice Slams Floor Clauses (‘Cláusulas Suelo’). Floor clauses (cláusulas suelo, in Spanish) was one of the abusive mortgage loan clauses  I denounced back in 2009 in my article (point one): 10 Common Abusive Clauses in Spanish Mortgage Loans.
  • Repossession procedures will now only take place when a borrower falls in arrears 12 quotas or 3% of the capital for the first half of the loan. However, if the default occurs on the second half of the loan, a lender may not start a repossession before 15 quotas are unpaid (approximately 15 months) or else 7%.  In other words, as these quotas are normally repaid on a monthly basis, lenders will now have to wait at least a full year before they are able to instigate a repossession procedure against a borrower. Up until recently lenders had to wait 3 months before they could repossess. Moreover, this 3-month rule was a recent change in itself, as lenders post-crash could execute a repossession with only one quota in arrears, which was simply bonkers.  I denounced this abusive mortgage clause back in 2009 in my article (point nine): 10 Common Abusive Clauses in Spanish Mortgage Loans.
  • A borrower must now visit a notary twice. Yes, you read right. The first time without a lender where the borrower will be given the opportunity to ask the Notary anything on their particular mortgage loan terms (all you ever wanted to ask on mortgage loans but were afraid to ask). The second visit will be with the lender to sign the Mortgage deed. Notaries will be ‘forced’ to pass a test to borrowers to see if they have fully comprehended the clauses of their own loan contracts (sic)!
  • The borrower will be handed over a copy of the mortgage contract at least 10 days ahead of signing at a Notary the Mortgage deed.
  • Changes to who pays for what on taking on a mortgage loan:
    Borrower pays for:

     

    • Properties’ appraisal, tasación in Spanish (on average between 400 to 700 euros). Borrower is free to choose the valuer.

    Lender pays for:

    • Stamp Duty (AJD) on the full mortgage loan amount.
    • Gestoría fees.
    • Notary fees.
    • Land Registry fees.

           Lenders to pay now for Stamp Duty on the mortgage loan (as we’d reported previously). Only this change all unto itself  translates into borrowers saving thousands of euros with this new law. Will lenders slyly pass on the increased costs to borrowers with more draconian mortgage terms? Likely. We shall have to wait and see.

  • Lenders may no longer tack on a mortgage loan ancillary non-requested linked financial services and products i.e. home insurance, life covers, pension plans, credit cards etc. This was one of the abusive mortgage clauses I denounced in my 2009 article (point 6): 10 Common Abusive Clauses in Spanish Mortgage Loans.
  • Early mortgage redemption penalties are now capped, being significantly reduced. In plain English, you can now repay your loan ahead of time without your bank imposing a huge penalty on you. Remember that lenders’ core business is to lend money and charge interests on it; if you repay a loan much sooner than agreed, your lender loses a lot of money over time. Which is why they impose these early redemption penalties, which are now capped.

Conclusion

The plethora of novelties are mostly positive for borrowers, bolstering their consumer rights.

However, while I’m always up for empowering consumer (borrowers’) rights, excessive over protectionism may create serious practical issues. If anything, Authorities should make it easier for potential buyers, not introduce uncalled for obstacles and additional red tape. Buyers already have to jump through enough hoops as it is.

For example, forcing borrowers to pass a test on their own mortgage clauses (!) is simply a bridge too far (read daft). It may be fine for chums like Juan Lopez, who is Spanish resident, and has no qualms in popping over to his Notary twice. But what about non-residents like Mrs Édith Piaf, who is a busy French career woman? How do I explain to my Paris-based client that she needs to book flights to Spain to visit a Notary twice? Does this seasoned professional really need to pass a test to gauge her contractual comprehension skills? I mean, really? Does this happen in any other country in the world? Talk about Spain being different.

What about the lost in translation shenanigans? Spanish notaries seldom speak any other language other than Spanish. Is he going to test her in French if her command of Spanish is non-existent? Will a translator be needed to step in to bridge the gap? Will her lawyer need to polish up on his language skills? What about other challenging languages? Is this an extra to pay now? Is a translator seriously expected to comprehend complex legal and financial mortgage loan clauses worded in archaic technical jargon and translate it seamlessly into Russian, Finnish, Dutch etc? Mortgage deeds in Spain are on average a 70-page plus document abounding in nuances, technicalities and mathematical formulas. That’s a whole lot to understand, translate and convey in one session. Who is going to pay for all this extra time and effort?

Sometimes excessive hand holding backfires leading to absurd new problems. Hopefully common sense will prevail.

We seem to have gone from one extreme to the other; from just “sign on the dotted line,” to testing borrowers on their mortgage knowledge. Striking the right balance is always a challenge.

“Virtue is the happy medium between two extremes.” – Aristotle.

Spain’s new mortgage law came into force on 16th of June 2019. It will greatly alleviate struggling family’s finances greatly bolstering consumer & lender rights.

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