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Spanish banks ordered to reimburse unfair mortgage interest

The European Court of Justice ruled Wednesday that Spanish banks must reimburse clients who had signed mortgage contracts that unfairly prevented them from benefiting from a steady drop in interest rates.

Spanish banks ordered to reimburse unfair mortgage interest
Photo: Shaun Curry / Flickr

Spanish banks were dealt a blow Wednesday after a European court ruled lenders must reimburse clients who signed mortgage contracts that prevented them benefiting from a steady drop in
interest rates.

The decision comes as Spain's banking system is struggling with the impact of mounting loan defaults, shrinking credit demand and tougher capital rules.   

The Bank of Spain estimates the ruling could cost Spain's banking sector over four billion euros ($4.2 billion), just four years after it received €41.4 billion in European Union bailout funds.

Spain's Supreme Court had ruled in May 2013 that so-called mortgage “floor clauses”, which impose a limit on how far mortgage interest rates can fall in line with a benchmark rate, were unfair because consumers had not been properly informed of the consequences.

But the court said lenders did not have to reimburse clients for any excess interest payments before the date of the 2013 ruling.   

The European Court of Justice ruled Wednesday that the proposed time limit on the refunds is illegal and customers should not be bound by such unfair terms.

“The finding of unfairness must have the effect of restoring the consumer to the situation that consumer would have been in if that term had not existed,” the Luxembourg-based court said in a statement.   

Most of Spain's home loans are pegged to the 12 month-euro interbank offered rate, or Euribor.

The benchmark has fallen, but thousands of clients with mortgage floors did not benefit.

Banking consumer lobby group Adicae estimates 2-4 million contracts with mortgage floors were signed in Spain.   

“It was a real fraud designed and set up by the banks,” the head of the association, Manuel Pardos, told a news conference.    

He was flanked by Rosa Polo, who lost her home after her monthly mortgage which had a “floor clause”, soared by €700 to €1,800.    

Last year she was forced to sell her flat for less than she paid for it because she could not keep up with the payments.   

“Now I still have a debt and don't have a home,” said Polo, who hopes to be reimbursed €40,000 from her bank.

Bank stocks fall

Spain's main opposition Socialist party called on Prime Minister Mariano Rajoy's conservative government to put in place a system to streamline the reimbursement and prevent customers from having to resort to courts to get their money.

Shares in Banco Popular, which estimates the ruling will cost it €334 million, fell over six percent in mid-afternoon trading.

BBVA, Spain's second-largest bank which estimates the decision will cost it €404 million, fell nearly two percent.

Small lender Liberbank took the biggest hit, falling over 13 percent.

Spanish banks lent heavily during an 11-year property boom which went bust in 2008, sparking a sharp economic downturn that caused the unemployment rate to soar to a record high of 27 percent in 2013.

At the height of the boom in 2007, banks issued 1.78 million housing loans worth a total of nearly 300 billion euros, according to national statistics institute INE.

The figure dropped to 372,000 housing loans last year worth around €49 billion.

Thousands of families who were not able to keep up with their mortgage payments were evicted from their homes, sparking a noisy protest movement that saw activists attempt to prevent police and bailiffs from enforcing eviction notices.

“Justice has been restored,” said Ignacio Fernandez Toxo, the head of Spain's largest union, Comisiones Obreras, after the ruling was announced.   

But Spain's biggest online property advertising site, Idealista.com, warned the ruling would likely lead to higher mortgage rates in the short term as banks seek to compensate for the extra expense.

By Adrien Vicente with Daniel Bosque / AFP

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PROPERTY

How to change from a variable to a fixed mortgage in Spain

The rise in interest rates has increased the price of variable mortgage rates by hundreds if not thousands of euros, causing panic among those who have this type of plan. So, what are the best ways to change to a fixed mortgage?

How to change from a variable to a fixed mortgage in Spain

With the rise in inflation, the price of daily goods going up and the increase in energy bills, residents in Spain are definitely feeling the squeeze on their wallets.

The cost of the Euribor (the basic rate of interest used in lending between banks in the European Union) has increased too, putting a further strain on people with variable mortgage rates and increasing their monthly payments. 

According to the latest data from Spain’s National Statistics Institute (INE), 28.4 percent of homes have a variable rate mortgage and 71.6 percent have a fixed rate.

What has the rise in interest rates meant for variable mortgage rates in Spain?

If for example you have a mortgage of €150,000 for 25 years, the increase in the Euribor could mean that you will be paying an extra €120 per month or an extra €1,400 per year.

READ ALSO: What the Euribor rise means for property buyers and owners in Spain

This is why many people on variable mortgages have been looking into the option of changing it to a fixed plan instead. 

What is the difference between a variable and a fixed mortgage?

A variable interest rate mortgage is where the interest charged on the outstanding balance changes based on factors such as the Euribor.  

A fixed interest rate loan is a loan where the interest rate on the loan remains the same each month for the amount of time you’ve taken out the mortgage for. 

Will variable mortgages keep rising to keep up with the rise in the Euribor?

The increase in the Euribor reached a daily rate of 2.5 percent last week, its highest level since January 2009. This means that if you have a variable mortgage rate, your payments will be subject to change to reflect this. When the interest rate is updated once a year or every six months, the price of your mortgage will go up.

How do I change from a variable rate to a fixed rate mortgage?

According to Miquel Riera from the finance website HelpMyCash.com, there are three different ways to do this in Spain.

The first way is called novación and is a way to modify the conditions of your current mortgage by going to your bank and signing a new agreement, however, it’s up to the bank if they will accept the new proposal and the terms and conditions for doing so.

The second way is what is called a creditor subrogation, which is when you transfer your mortgage from one bank to another one, so that you can modify the price or the terms. This involves contacting many different banks in order to find one that will agree to take on the loan and accept the change in interest rate to a fixed one.

Finally, the last way is to take out a new mortgage at a fixed rate and use the money to pay off your existing variable-interest loan. In this case, you can take out the new mortgage with the same bank or a different one.

According to the housing website Idealista, if you’re going to change banks and find better conditions, it’s best to hire a mortgage broker, so you can get a broad perspective of the different loans available, as well as the various banks that offer them.

How much will it cost me?

This entirely depends on what type of agreement you organise with your bank, but according to Riera, if you switch to a fixed rate via one of the first two ways, you may be charged for an additional assessment on your home.

This could cost around €300, but by law, the amount cannot exceed 0.15 percent of the outstanding amount of the mortgage. But, if it’s after the fourth year since you’ve taken out your mortgage, then this extra commission can’t be charged.

If you choose the third option and take out a new mortgage, then your costs will be significantly higher because you will have to pay property tax, possibly fees for taking out a new loan, as well as other associated fees, which could be between 0 and 1 percent of the amount. There are also cancellation fees to pay off your existing mortgage, which could be around €1,000 on average.

So, although contracting a new mortgage may seem like the best idea at first, it can actually be the more expensive option.

Are banks willing to negotiate?

According to the Association of Financial Users (Asufin), this will depend on the type of loan you have, the amount that remains on your mortgage and your personal situation. They also stress that banks are not obliged by law to offer you an alternative.

The president of the Spanish Mortgage Association, Santos González states that “Families are not going to find a lower offer in the market… There is not a strong likelihood that you will be able to make a big negotiation that would ease the rise in costs.”

What are the pros and cons of changing my mortgage?

The main advantage is of course changing to a rate that is more stable, so you know exactly how much you will be paying out every month.

One of the disadvantages is that if Euribor falls again in the future, you will not be able to benefit from the decrease and will have to continue paying the same amount.

Asufin also warns people that the costs of exchanging the mortgage may work out more expensive, so in the end, it will not be advantageous for you to do so.

According to Idealista, it is really only worthwhile changing your mortgage from a variable to a fixed rate in the first half of the life of your mortgage. For example, if you have a 30-year mortgage, it’s advisable to only change it during the first 15 years. This is because the majority of the amount of the loan is paid during this period. 

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