After two years of waiting, Spain's new mortgage laws come into effect this month. These laws stem from an EU directive to align mortgage laws within EU member states and to improve the behavior of mortgage issuers.
In the past, Spain's mortgage laws were very favorable to banks and often punitive to borrowers. The new laws are very good news for homeowners and people wishing to purchase property in Spain.
Keep reading to learn the changes that will affect borrowers the most.
Longer default period before repossession
This is the best news for homeowners. In the past, Spanish mortgage laws allowed lenders to begin the repossession process if a borrower was three months late in their mortgage payments.
Moreover, the current three-month rule was a recent change. Following the 2008 financial crisis, lenders could repossess a home if a borrower missed only one monthly mortgage payment.
Spain's new mortgage laws state that:
- In the first half of the mortgage term, lenders cannot repossess a property until the borrower is 12 months late in their mortgage payments, or the total amount of their arrears is more than 3 percent of the total capital loaned.
- In the second half of the mortgage term, lenders cannot repossess a property until the borrower is 15 months late in their mortgage payments, or the total amount of their arrears is more than 7percent of the total capital loaned.
- Late payment fees can be no more than 3 percent of the amount in arrears. Before the new mortgage laws, late payments fees were up to 12 percent.
More mortgage fees paid by the banks
This is another game changer for borrowers. The fees associated with a Spanish mortgage are:
- Fees paid to a gestor. Gestor fees generally amount to a few hundred euros.
- Fees paid to the Notary.
- Fees paid to the Land Registry. Fees paid to the Notary and Land Registry usually amount to around 10percent of the property value.
- The AJD (Actos Juridicos Documentados), or mortgage tax. Depending upon the region in which you reside, the AJD can amount to up to 2.5 percent of the property value.
- Property valuation fee. This typically amounts to 0.1 percent of the property value.
- Mortgage origination fee. On average, this amounts to 1.5 percent of the property value.
In the past, ALL of the above costs were born by the borrower. Spain's new mortgage laws state that lenders must now pay all of the above fees, except for the property valuation fee and origination fee. So, banks have gone from paying none of the mortgage fees to paying the majority of the fees.
Lenders can no longer force borrowers to purchase other products
Spanish banks are geniuses at cross-selling. In the past, they required borrowers to purchase life insurance and home insurance before issuing a mortgage. Now, they must allow borrowers to accept insurance from external carriers. Moreover, they cannot threaten to raise the interest rate if the insurance is issued by a third party.
'Floor clauses' will be removed
Prior to Spain's new mortgage laws, lenders put a floor on variable rate mortgages. Meaning if interest rates went up, they made more money but they were protected if interest rates fell. Now, the floor is 0 percent of the mortgage rate (not EURIBOR).
This provides additional protection for borrowers since a mortgage interest rate is always higher than EURIBOR. This is particularly relevant in the current environment, where EURIBOR is currently in negative territory.
Spain's new mortgage laws will allow borrowers to convert foreign currency denominated mortgages into euros
Bank clients with mortgages denominated in currencies other than the euro have the right to convert their mortgage to euros at any time. Additionally, banks must periodically inform their clients if their total debt is increased due to currency fluctuations.
If the above requirements are not honored by the bank the contract will be considered void. Interestingly, the borrower could demand that their mortgage is converted to euros retroactively and that all over payments in the other currency be deducted from the pending capital of the mortgage.
It will be cheaper for borrowers to repay their mortgages mid-term
Early repayment fees are cheaper and can only be assessed if the bank will incur a loss from early payment. Repayment fees ahave now reduced from 0.5 percent within five years of a variable rate mortgage to 0.25 percent within three years and 0.15 percent if repayment occurs within four to fve years of mortgage being taken out. There will be no fee if repayment occurs after five years.
Additionally, banks will no longer be able to delay the early repayment of a mortgage, which happened in the past. Spain's new mortgage laws stipulate that the maximum notification time a bank can demand is one month. After notification of intent to repay the mortgage, banks have three working days to assess the demand and provide the relevant information.
It will be cheaper to convert a floating rate mortgage to a fixed rate mortgage
Spain's new mortgage laws stipulate that banks can charge no more than 0.15percent to convert a mortgage from a floating to a fixed rate. These can only be assessed in the first three years of the mortgage. After that, the fee is 0percent. However, in this instance the borrower must pay the associated notary and Land Registry fees.
More protection for consumers
The new laws contain a number of other conditions to protect consumers. The primary ones are:
- The standard mortgage offer document, called a FIPER, will be replaced with a FEIN. Much more detailed and transparent than the FIPER, it will allow borrowers to shop around for their mortages. If the mortgage is floating rate, the borrower will also receive a separate document outlining the potential effect of interest rate fluctuations.
- A 10 day “cooling off” period. Borrowers must wait 10 days between receiving a FEIN and signing the loan documents.
- Borrowers must take a small test at the notary to demonstrate they understand how the mortgage works.
- The Banco de España will create a new agency to process mortgage related complaints and claims.
- All commissions granted to lenders for issuing mortgages must be fully transparent.
Spain's new mortgage laws are a welcome addition. Not only will they protect consumers, they will also stimulate the housing market as currently, many Spaniards are terrified of taking out a mortgage and the fees involved. Additionally, the foreign currency conversion provision provides additional protection for expat borrowers.
This advice has been supplied by Moving2Madrid. If you are relocating to Madrid and want advice on buying contact Moving2Madrid to make an appointment for a free consultation.