After a two year wait, Spain’s New Mortgage Law finally became active in June 2019. But how does the law affect the mortgage market in Spain?
I’ve tried to cover the main aspects of the new legislation below.
1. Mortgage-related costs
Here are the fees now associated with mortgages in Spain:
Paid by the bank
• Fees paid to a gestor
• Fees paid to Notary
• Fees paid to the land registry
• Fees paid to Actos Juridicos Documentados (AJD)
Paid by the client
• Property valuation fee
• Mortgage opening fee
Initially, all of the above costs were paid by the homebuyers (clients). With these new changes, it means a lot of the costs are now made by the bank, lessening the burden on homebuyers.
2. More protection for consumers
The main reason behind a lot of these changes is to provide better protection for the consumer and make the whole process more transparent. Here are the key points:
- The consumers must be provided with Ficha Europea de Informacion Normalizada (FEIN)- a more detailed and transparent standardized mortgage document which gives you as a buyer all the terms and conditions in detail regarding the mortgage credit on offer.
- If the mortgage is on floating/variable rate, the borrower must be served with a separate document showing potential effects of fluctuations in the rates.
- The clients must wait for a period of 10 days after receiving FEIN before signing the loan documents.
- The borrowers will have a compulsory test undertaken at the notary to demonstrate their understanding of the mortgage contract.
- All the clauses in the mortgage contract must comply with the law or they’ll be declared void and the borrowers can take legal action against the bank.
3. Cheaper early mortgage repayments
Early repayment fees are cheaper and will only be charged if the bank incurs a loss. The limit will vary depending on the mortgage’s type.
The repayment fees have reduced to 0.25 per cent within 3 years of contract and 0.15 per cent within five years of the mortgage’s term.
Banks can no longer delay early payments since there will be a legal framework directing how the whole process should happen and the timeframe it should take once the client makes a request.
4. Cheaper to convert from floating to a fixed-rate mortgage
The new mortgage law in Spain stipulates that banks shouldn’t charge more than 0.15 per cent to convert a mortgage from a variable-rate to a fixed rate. The charges will only be assessed if the change happens within the first three years of the mortgage term. After 3 years, the fee is 0% but the borrower must pay any fees associated with the notary or registry.
5. Longer default period before repossession occurs
This is perhaps the best change to mortgage borrowers. Before, the lenders were allowed to start the repossession process if a borrower had defaulted payment for three consecutive months.
The following limits have to be reached before a bank will be allowed to initiate the repossession process:
- Within the first half of the mortgage term- lenders can’t repossess the property until the borrower has defaulted payments for a period of 12 months or the total arrears exceeds 3 per cent of the capital loaned.
- Within the second half of the mortgage term – lenders can’t repossess the property until the borrower defaults payments for a period of 15 months or the total arrears exceed 7 per cent of the total capital loaned.
- Late payment fee shouldn’t exceed 3 per cent of the total amount in arrears.
6. Lenders can’t force borrowers to purchase extra products
Before, bankers were allowed to do cross-selling. For instance, they required a borrower to buy attached services like life insurance or home insurance in order to get a mortgage.
They can, however, offer lower mortgage interest and in return but the borrower must purchase a service from the bank.
Also, no added interest if a borrower gets insurance from a third party.
7. Floor clauses will be banned
Before, lenders put a Floor Clause on variable rate mortgages such that if interests went up, they made more money but in the instance where the interest rates fell, they were protected. This is no longer legal and will provide protection to the borrowers as the mortgage interest rate is usually higher than EURIBOR
8. Multi-currency mortgages
Clients with mortgages in other currencies can convert it to Euros at will. In addition, banks have the responsibility to inform the borrowers should their total debt increase due to currency fluctuations.
If the above isn’t honoured by banks, the contract should be considered void.
9. Regulations of Intermediaries
Here are the key points:
- The lenders and intermediaries should not have criminal records and should not be declared bankrupt if they want to operate in Spain.
- All commissions acquired by the lenders for issuing mortgages should be transparent.
10. New body to settle complaints and claims
Finally, yet importantly, the Banco de España will put up a new agency that will process mortgage-related complaints and claims.
The new legislation came into effect on the 16th of June 2019. All the above is great news for consumers and helps align Spanish mortgage law with EU directives.