Archive for the ‘Spanish Banks’ Category
How to remove the minimum interest rate clause from your mortgage.
If your mortgage has a minimum interest rate, or mortgage floor, it can cost you money.
What is a mortgage with a minimum interest rate?
HelpMyCash.com, a mortgage portal, explains that a mortgage floor is a mortgage in which there is a lower limit on the amount of interest you pay on your mortgage each month, which means that if the Euribor falls below a certain level you do not benefit from the fall, even though, in these times of crisis, there are a lot of families whose monthly mortgage payments have been greatly reduced thanks to reductions in the Euribor.
Mortgage contracts which have a minimum interest rate also have a variable interest rate (Euribor + differential) and this means that banks can use the two rates in the following way:-
- If the Euribor + differential is below the minimum interest rate, the bank charges the minimum interest rate
- If the Euribor + differential is higher than the minimum interest rate, the bank charges the Euribor + differential.
This means that banks will always charge the higher amount, whatever the rates.
When does a mortgage floor constitute an unfair clause?
Although there are multiple irregularities regarding mortgage floors (confusing publicity, banks failing to provide sufficient information, being deemed unfair under Article 49 of the Consumer Act etc), from a legal point of view, mortgages with a minimum interest rate can only be considered to be unfair when they fulfill at least one of the two following conditions:-
1. The contract with a minimum interest rate does not have a cap. That is to say, the bank protects itself against reductions in the Euribor, but does not offer the mortgager any protection if the Euribor goes up.
2. There is no legally binding mortgage offer (document drawn up by the bank which contains the exact mortgage conditions agreed upon by the parties), the mortgage offer does not mention a floor, or it is not signed by the customer. For this reason, it is always best to start by negotiating with your bank. There are various ways to try and remove, or at least reduce, a mortgage floor.
Recommendations on how to remove a mortgage floor from your mortgage:-
1. Negotiate with your bank before the periodic mortgage review.
As a result of the complaints made by several consumer associations and bank customers over recent months, banks are coming to realise that the era of “anything goes” is coming to an end. For this reason they are increasingly willing to remove these controversial clauses from the contracts, or at least reduce them, if customers ask them to do so before the periodic mortgage review. If you have a good financial reputation and an excellent payment history, the bank should do everything in its power to keep you as a customer.
2. Consider a mortgage subrogation (change of bank).
If the bank is unwilling to modify or negotiate the mortgage floor, you can consider the possibility of changing banks. If the new bank offers you better terms by removing the minimum interest rate, and puts this offer into writing in a legally binding mortgage offer, you can use this offer as a negotiating tool with your bank. It will only have two options: match the offer to keep you as a customer, or let you sign the better option.
3. Demand your rights through legal means.
If the negotiations with the bank are not successful, you can still claim your right to a mortgage with no unfair clauses by making a complaint. There are 3 main ways of doing this: (1) making a formal complaint by submitting an extrajudicial complaint to Banco de España (although Banco de España’s decisions are not legally binding); (2) taking private legal action against the bank, and; (3) becoming a member of an association such as ADICAE, ASUAPEDEFIN or similar organisations and becoming part of a joint complaint. As of the time of writing, these actions have prompted several banks against which complaints had been lodged into calling the affected parties, and offering them a reduced interest rate in exchange for withdrawing the complaint.
Recommendations from ADICAE when taking out a mortgage:-
The Banks and Insurance Consumers Association of Spain (ADICAE) recommends that all homebuyers should calculate how much they will pay for the mortgage on the basis of the whole mortgage term, and not just the first five years, as it believes that the latter approach is misleading. To help people avoid the worst mortgage traps, the Association offers several recommendations for anyone thinking of taking out a mortgage.
1: Customers should avoid any binding conditions which are unfair. It is important to take into account the fact that many financial institutions offer loans with a differential over the Euribor of less than 0.5%, but that this offer is conditional to contracting products, pension plans, or investment funds, all of which makes the mortgage much more expensive
2: The requirement for loan guarantees should not be accepted at any time, as it is the borrower, with the property, that is responsible for the loan, and not the guarantor.
3: Toxic products such as minimum interest rate clauses or swap contracts are high risk, and should be avoided. ADICAE thinks that a fair minimum interest rate clause would be one which had a 2% floor, and a 6% cap. If your mortgage has a floor, read these recommendations.
4: ADICAE advises against going to debt consolidators. The OCU also advised against using them because they earn substantial commissions from acting as intermediaries between clients and banks, and because the solutions they provide are the same ones that you would get by negotiating directly with the bank.
Credit: Fuster & Associates. www.spainsolicitors.com
Paying Tax in Spain – Exploding the Myths
Many British expatriates arrive in Spain to live without fully understanding the local tax situation or any obligations that may remain to the UK taxman. There are quite a few myths around and unless you are properly informed you may get your tax planning wrong. This article looks at some of the common misconceptions and separates fact from fiction.
I am resident in Spain but complete a full tax return in the UK
► You become resident for tax purposes in Spain if:
- you spend more than 183 days in one calendar year in Spain (the days do not have to be consecutive), or
- your “centre of economic interests” is in Spain, or
- your “centre of vital interests” is in Spain, or
- your spouse is resident in Spain unless you can prove you are resident in another country.
► As a resident of Spain you are liable for income and capital gains taxes on your worldwide income.
► If you receive a gift or inheritance as a Spanish resident, you may be liable to Spanish succession tax.
► You must complete a Spanish tax return in respect of your worldwide income.
► A UK tax return only needs to be completed in respect of certain non-exempt income, such as rental income from UK property.
I am taxed at source on my UK assets and therefore I am not liable to tax in Spain on these assets
► You are entitled to double tax relief if you have income subject to tax at source in the UK which is also taxed in Spain.
► You can usually make arrangements for tax not to be deducted at source in the UK on certain types of income. This income would then be received gross and taxed solely in Spain.
I am taxed at source on my offshore bank accounts under the EU Savings Tax Directive and therefore am not liable to tax in Spain
► Paying withholding tax on offshore interest payments does not mean that you have no further tax liabilities on the same income in Spain.
► You still must declare such earnings on your Spanish tax return.
► If you pay the withholding tax and declare the income in Spain you are unlikely to receive any tax credit in Spain and could pay tax twice.
I can withdraw 5% of my UK/offshore insurance bond per year for 20 years without any liability to Spanish tax
► The 5% rule only applies to UK residents.
► As a Spanish tax resident, your offshore insurance bond will be taxed according to the Spanish rules.
There is no tax to pay if I have not taken withdrawals from my insurance bond
► The taxation of insurance bonds in Spain depends on whether the bond is ‘qualifying’ (issued by an EU country and compliant with Spanish regulations) or ‘non-qualifying’.
► Non-qualifying bonds are valued at 31st December each year and any increase in value from 1st January is taxed in full as income, even if there has been no withdrawal. The taxable income is taxed as savings income, so at 19% on the first €6,000 and 21% on any balance. For example, if an investment bond increases in value by 10% from €200,000 to €220,000 in any one year, the tax payable in Spain is €4,080 (€6,000 x19% = €1,140, + €14,000 × 21% = €2,940).
► Any fund located in a ‘tax haven’ (eg Isle of Man, Jersey, Guernsey) is non-qualifying and will receive this unfavourable tax treatment.
A withdrawal from a qualifying offshore bond will be taxed at 19% on the first €6,000 and 21% on any balance
► There is no tax to pay until a withdrawal is made from qualifying bonds in Spain.
► The taxation is very favourable because only the growth in value element is taxed, not the whole withdrawal. Using the above example, if you withdraw €20,000 you will only need to pay tax on roughly 10% of it. The taxable income is therefore €2,000 and your tax liability (at 19%) is only €380.
UK investment bonds are tax free in the UK for Spanish residents
► A UK investment bond is taxed at source in the UK.
► The tax deducted can be set against your tax liability in Spain, so you do not pay tax twice on the same income.
► If you have either a non-qualifying insurance bond or a UK investment bond it will be advantageous to transfer it to a qualifying, non-UK, bond.
I am a UK national and not liable to Spanish succession tax (SST)
► SST is payable if the inheritor or recipient of a gift is resident in Spain, or the asset being gifted or passed on death is situated in Spain.
► The tax rate can be as high as 34% for inheritances or gifts within the immediate family or higher for more distantly related recipients.
► Depending on which region you live in, there are usually deductions available according to the closeness in relationship between the recipient and the deceased, and other exemptions may be available.
► SST can often be avoided through use of an offshore trust.
Contact an experienced international tax and wealth management adviser like Blevins Franks for advice on tax mitigation strategies in Spain.
Note that the tax treatment(s) detailed above are current at the time of writing and may change in the future.
By Bill Blevins, Managing Director, Blevins Franks
Offshore Banking Moves Further Towards Tax Transparency
Few expatriates used to think twice about opening an offshore account. They provide a means of keeping Sterling outside the UK (useful to help prove your UK-non residency status); you can usually open and use them from anywhere in the world; interest rates were often higher than their onshore counterparts and they have also been popular for ‘tax planning’ purposes.
While the first two benefits listed above still apply, offshore banks do not necessarily offer the same interest rate advantages that they used to, and from a tax planning point of view the situation is very different today, with more developments on the horizon.
Following the collapse of Icelandic banks in the Isle of Man and Channel Islands, savers also began to question how safe their savings were, even through the jurisdictions did then implement or improve depositor protection schemes.
As a result of these changes, more savers today are considering alternative homes for their wealth.
Offshore banks were often used by people to hide capital and interest earnings away from the taxman. While they were legally obliged to declare worldwide income, the taxman had no means of tracing their account so there was little pressure to report it. Interest was usually paid gross and as offshore banks were not bound by the laws of your country of residence it was a case of ‘what the taxman doesn’t know about he can’t tax’.
The introduction of the EU Savings Tax Directive in 2005 served to change this. All Member States are required to operate automatic exchange of information on interest payments on accounts held by residents of other States. However, Belgium, Luxembourg and Austria were allowed to operate a withholding tax system with a view to change to automatic exchange of information after a transitional period.
The Isle of Man and the Channel Islands also operate withholding tax with the option for exchange of information. The withholding tax option effectively maintains banking secrecy. Although the interest earnings now have tax deducted at source, it still falls to the owner to declare it in his country of residence.
By this time next year this will have changed. In June the Isle of Man parliament agreed that from 1st July 2011 it will withdraw the withholding tax option and only operate automatic exchange of information – there will be no more banking confidentiality for EU residents. This was an endorsement of the commitment it made at the Organisation for Economic Co-operation and Development (OECD) Forum in June 2009. It was the first offshore jurisdiction to do this and the decision will impact on all expatriates who have not declared their Isle of Man accounts in their country of residence. Anyone affected by this will need to ensure that they have reported all their interest to their local tax authority … or bear the consequences.
Following quickly on the Isle of Man’s heels, on 28th July Guernsey’s Chief Minister announced that the jurisdiction will introduce automatic exchange of information, thereby abolishing the current option to pay a withholding tax and avoid disclosure. A government announcement said that Fiscal and Economic Policy Group has recommended to the Policy Committee that institutions in Guernsey should move to automatic exchange of information from 1st January 2011, and no later than 1st July 2011.
Following the announcement, other European jurisdictions which operate the withholding tax option, eg Switzerland, could come under increased pressure to follow suit. In any case, the withholding tax rates jumps from 20% to 35% next July.
High interest rates a distant memory
Currently interest earned in offshore banks is not generally more beneficial than onshore banks. The days have passed when they were in a position to offer high returns to attract investors.
With the money markets expecting the Bank of England base rate to stay low for some time, many offshore banks have cut the rates they offer on fixed rate bonds. In June, Michelle Slade of Moneyfacts warned that now that demand for savers’ money has eased, rates are being cut as banks readjust back to more normal margins. “Banks do not want to pay more than they have to on savings, so once a few cut rates, others will invariably follow,” she said.
While a couple of banks did increase rates on fixed term bonds in July, there are still very few attractive rates available to those who do not want to tie up their money for too long.
Who owns your bank?
Do you really know who owns the offshore bank you may be using and in which jurisdiction it is based? Since the credit crunch more countries have set up depositor protection schemes but you would need to check with the bank exactly what protection they offer. Banks are no longer considered to be 100% safe and in the event of another failure it could take a long time to receive compensation.
Offshore banks closing
At any time and without much warning offshore banks are being closed down, leaving savers with less options. In June Northern Rock announced that it is closing down its operation in Guernsey on 2nd September and Irish Permanent said it was shutting its Isle of Man branch by the end of the year. Other banks may follow as they retrench and reduce peripheral arms of their business. For example the Yorkshire Building Society is deciding whether to keep Yorkshire Guernsey open or not.
More and more foreign banks are closing their doors to US citizens as the US authorities take ever draconian measures to trace and prevent tax evasion. France started to close branches of French banks in tax havens from March 2010.
Many of advantages that offshore banks used to offer investors are gradually being eroded. There are investment structures available which can reduce tax liability, and offer the potential for capital growth and higher rates of return. Speak to an experienced tax and wealth manager like Blevins Franks for the most suitable tax planning and investment strategy to meet your specific circumstances.
By Bill Blevins, Managing Director, Blevins Franks
Were The EU Bank Tests Stressful Enough?
On 23rd July the results of the much anticipated stress tests on European banks were published. There were no surprises, with just seven out of the 91 banks tested across the 27 EU Member States failing. But does this mean that European banks are safely out of the woods? While the results will hopefully give the markets more confidence, there are concerns that the tests were too lenient.
The stress tests were carried out by the Committee of European Banking Supervisors (CEBS) in close cooperation with the European Central Bank (ECB). They tested Tier 1 capital ratios (the percentage of a bank’s equity capital to its risk weighted assets and a common measure of a bank’s resilience to shocks) under a benchmark scenario for 2010 and 2011.
The aim was to assess how resilient the EU banking system would be to another economic downturn and to what extent banks could absorb adverse movements in the sovereign debt and credit markets.
The regulatory minimum for Tier 1 capital is 4%, but for the purpose of the exercise it was set at 6%. Tests were carried out for the two-year period ending 31st December 2011 for an adverse scenario assuming a 3% deviation of gross domestic product for the EU compared to the European Commission’s forecasts cumulated over the period.
The seven banks whose Tier 1 capital ratio fell below 6%, with a capital shortfall of €3.5 billion, were Germany’s Hypo Real Estate, Greece’s ATE bank and five regional savings banks in Spain (Unnim, Cajasur, Diada, Espiga and Banca Civica).
There has been widespread criticism that the conditions were too easy.
A commentary released by Aberdeen said: “Arguably more banks would have failed had the CEBS adopted more strenuous modelling. Rather than a 3% deviation in the EU’s growth forecast they could have factored in a greater than 5% double-dip. Furthermore the CEBS assumed no sovereign default, with the worst case scenario a 23.1% haircut on Greek sovereign debt.”
Other analysts believe a 7% Tier 1 capital radio would have been a more credible benchmark. In this case Allied Irish Banks, Germany’s Postbank (one of its largest), Italy’s Monte del Paschi, Portugal’s Espirito Santo and Greece’s Piraeus would all have failed.
Credit Suisse pointed out that the tests based just on core Tier 1 would have been a more reliable test – and would resulted in the whole of the Greek banking system, plus many other lenders, failing.
The tests also assume that all States would contract at the same rate in a downturn, whereas the ‘Club Med’ states and Ireland would probably contract more if a downturn comes on top of their current fiscal tightening and debt-leveraging.
According to research by the Royal Bank of Scotland (RBS) at the end of May, Greece, Spain and Portugal had issued public and private debt worth €2.16 trillion between them, equating to 22% of the region’s gross domestic product.
Other responses to the stress tests were most positive. In its half yearly global outlook the Bank of America said they marked the “beginning of a return to normality”, with its chief European economist commenting: “Greece is staging an impressive fiscal turn-around. Spain has come through its July peak funding with flying colours. Europe can and will get its problems under control.”
Aberdeen’s communication concluded by saying that the European banking system appears reasonably well placed to withstand a conventional downturn… but the results tell us little about how banks would cope in more extreme scenarios. It called for greater disclosure by banks on the nature of their asset bases and liquidity profiles to help foster confidence in the banking system.
Confidence in European banks will not have been helped by an article entitled “Europe’s €30 trillion headache” published in The Telegraph on 29th July.
The article covers a new report by rating agency Standard & Poor’s (S&P) which reveals that European banks have amassed €30 trillion in liabilities and face a serious funding threat over the next two years.
With European banks, most of their mortgages and personal loans remain on their balance sheets and need funding. The three month loans offered by the ECB’s emergency lending effectively concentrated roll over risk for large amounts of debt. Banks will eventually have to refund these loans in a crowded market. S&P commented: “ECB loans have contributed to a shortening of liability maturities. The result is a growing funding mismatch for the European banking industry. This is happening as regulators prepare to introduce tougher liquidity standards. This is one of the greatest vulnerabilities of the industry”.
Around €1 trillion of debt in the Eurozone and Britain will become due by 2012. The stronger banks will cope, but what about the weaker ones?
Silvio Peruzzo from RBS told The Telegraph: “If down the line the markets start to question the debt trajectories of [Club Med] countries, the banking systems will be tested again. There is €1 trillion of private debt in Spain linked to just one asset: property.”
In its Financial Stability Report at the end of May, the ECB had also warned that Eurozone banks are now experiencing a second wave of writedowns. It predicted that they will suffer loan losses amounting to €195 billion over 2010 and 2011 – on top of the €238 billion written off in bad debts by the end of 2009.
None of this necessarily means that there will be more bank failures in future – but nor should we rule the possibility out completely. The European banking industry is not out of the woods yet.
Whether it is your bank accounts, insurance policies or your investments, you should always establish to what extent they are protected in the event of institutional failure. When it comes to your investments, try to use arrangements whereby your assets are not held on the institution’s balance sheet. This way your assets are segregated from potential creditors of the institution, giving you peace of mind that your capital is protected.
Seek professional advice from an authorised advisory firm such as Blevins Franks Financial Management Ltd on the arrangements which would provide the highest security for your wealth.
Blevins Franks Financial Management Ltd is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.
By Bill Blevins, Managing Director, Blevins Franks
Spanish Tax Rise to Target the Wealthy
Wealthy individuals living in Spain need to brace themselves for an unexpected tax shock. Spanish Prime Minister, José Luis Rodríguez Zapatero, has announced an imminent tax increase for “those who actually have more”. Whether this is the last of the tax rises or there are more to follow remains to be seen. It raises the importance of tax planning to minimise your tax liabilities and protect your wealth.
In giving warning of the impending tax rise on the wealthy, dubbed a “millionaire tax”, on 26th May Zapatero told parliament that it would affect only those with a “high economic capacity”. At the time of writing details have not been released on how the tax would apply or how long for.
It marks a clear u-turn by the government, which had only very recently rejected the idea of imposing a millionaire tax, with Zapatero explaining that the time was not right for such plans. While he now says that only the wealthiest will be affected, the middle classes will be concerned that he will also backtrack on his promise not to target them if the need arises.
Determined to save around €15 billion by 2011, the Spanish government earlier presented an austerity package, which includes a 5% pay cut for public sector employees and a freeze on pensions. Along with an already planned increase in VAT these deficit reduction measures will affect a broad section of Spanish taxpayers, but Zapatero feels that the better off should make a special effort. “In my opinion, any citizen feels that the effort should be greater from those who have more,” he told an EU news conference. It places a heavy burden on affluent taxpayers whom the authorities and public alike feel should pay for the bulk of the deficit bailout. Spain aims to reduce its budget deficit from 11.2% last year to 9.3% this year, 6% in 2011 and below the 3% EU threshold by 2013.
There has been some speculation about which taxes would rise, with an article in El Mundo on 19th May listing potential areas where the government could increase taxation.
Tax increase on income
The highest rate of income tax is currently 43%, applying to those earning over €53,407 in the current tax year. This tax rate could be increased for higher earners and tax bands potentially narrowed. Some reports had suggested a tax rate of 48% for those earning over €150,000.
The El Mundo article said that Ministry of Finance specialists, Gestha (Sindicato de tecnicos del ministerio de hacienda), had suggested targeting income over €600,000. 3.7% of taxpayers declare incomes above €60,000 a year which would not bring in an effective amount of revenue – so how large would the tax rise have to be on this group of high earners?
Wealth tax
Wealth tax could be another option for the government. The tax rate was effectively reduced to zero on 1st January 2008 by applying a 100% tax credit, leaving scope for this to be reversed. It is thought that the tax rate could be reintroduced for those having a net wealth in excess of €1.5 million, which could raise an additional €1,240 million annually.
SICAVs
An SICAV is a type of open-ended collective investment scheme and has been a controversial structure in Spain as this type of investment attracts a very low tax – as little as 1% – much lower tax than other investment funds. There are 440,000 investors in SICAVs in Spain, and although the government has rejected increasing the tax rate on these so far for fear that investors would leave the country for more tax advantageous jurisdictions, there is plenty of scope to raise the tax rate to collect more revenue.
In the 2010 Spanish Budget tax on savings income was raised to 19% from 18% on the first €6,000 and 21% on the excess.
Succession tax
The Institute of Fiscal Studies (IEF), an organisation linked to the Ministry for Economic Affairs, has carried out studies looking at a new tax on succession which would establish a common minimum tax across all of the autonomous regions. In recent years there has been a drop in the succession tax collected and this would go some way to shore up an historic deficit position in the autonomous communities.
Bank tax
The “bank tax” being discussed by the EU, otherwise known as the Tobin tax, would affect 295 Spanish financial institutions. Gestha estimates a tax here of five points could raise €1,285 million.
Excise and VAT
Even though tax on tobacco and fuel was raised last June, it could be hiked further, as well as an increase on alcohol.
The VAT rate is already due to increase from 16% to 18% from 1st July 2010. The reduced rate currently applied to services and food production will increase from 7% to 8%.
To limit the impact of the potential Spanish tax increases, wealthy taxpayers can often use effective tax planning measures to reduce their tax liabilities. This will protect your wealth giving you more to spend on the lifestyle to which you are accustomed and protect the inheritance you intend to leave to your family. A tax and wealth management specialist like Blevins Franks can advise you on the appropriate tax planning to suit your specific needs.
By Bill Blevins, Managing Director, Blevins Franks
Bank Debt Back In the Spotlight
The scenes of long queues of people outside Northern Rock have faded somewhat from memory. While not completely forgotten, they seem a long time ago now – it was in September 2007 after all. The following autumn then saw the collapse of Lehman Brothers and less than a month later Icelandic banks Kaupthing and Landsbanki stopped trading, a move which impacted on the many expatriates who had savings in their offshore branches.
We then lived in suspense for a while, wondering if any other similar banks could fail. Savers spread their money out over different banks to increase protection from depositor guarantee schemes, or moved money out of banks and into arrangements which provide protection from institutional failure.
As the credit crisis slowly lifted, fears about bank failures abated. The issue of bank debt, however, is now back squarely in the spotlight again thanks to the financial crisis in Greece and fears over contagion to Eurozone countries like Spain, Portugal, Italy and Ireland.
It is impossible to escape news about the crisis facing Europe and its currency at the moment. Everyday seems to turn up something new. One article which really stood out for me, though, was one published in the New York Times on 1st May 2010 entitled “Europe’s Web of Debt”. Using data supplied by the Bank for International Settlements, it highlighted the extent to which the “vulnerable” countries on the periphery of the Eurozone have become interwoven, all both owing money and being owed money to/from the others – and this is besides the vast sums owed to countries like Germany, France and the UK.
This creates the risk of a domino effect if one country defaults. For example, if Greece defaults on its debts to Portugal, how would the already struggling Portugal cope? Would the losses impact on its ability to repay its debts to Spain, one of the weakest economies in Europe?
For example, here are the figures relating to Spain -
Spain is owed:
By Portugal – $86bn
By Italy – $47bn
By Ireland – $16bn
By Greece – $1.3bn
Spain owes:
To Portugal – $28bn
To Italy – $31bn
To Ireland – $30bn
To Greece – $0.4bn
Spain also owes:
To Germany – $238bn
To France – $220bn
To the UK – $114bn
Portugal, Italy, Ireland and Greece are in a similar situation. Total debt is as follows -
Spain – $1.1 trillion
Italy – $1.4 trillion
Ireland – $867 billion
Portugal – $286 billion
Greece – $236 billion
As of 19th May 2010, in an unexpected move, Germany’s financial regulator BaFin prohibited short trading on banks, insurers and Eurozone bonds and banned credit default swaps (CDS) on sovereign bonds until 31st March 2011. It said that the “extraordinary volatility” of debt securities from Eurozone countries justified its action, as did the fact that CDS movements “could jeopardise the stability of the financial system as a whole.”
The move has echoes of autumn 2008 when, following the collapse of Lehman Brothers, the UK and US temporarily banned shorting bank shares to prevent speculators causing another major bank to collapse. It has led some commentators to wonder about the health of the German banking system. Last May BaFin had warned that the toxic debt held by Germany’s banks could blow up “like a grenade” when hidden losses from the credit crisis came to light, and feared write offs could exceed €800 billion. German lenders are now facing a second set of losses on so called “Club Med” holdings.
Tim Congdon from the International Monetary Research observed that in the second week of May, ECB data showed that there was a “major run” on Club Med banks, with €56 billion of interbank lending moving from periphery Eurozone countries to core ones.
The BaFin ban on short trading then triggered a capital flight from Germany to Switzerland. If money continues to move out of the core, affecting countries like the UK and France as well as Germany, Europe may soon find itself with depleted depository capital.
On 31st May, the European Central Bank warned that Eurozone banks face up to €195bn in a “second wave” of potential loan losses over the next 18 months.
We would be wise not to be complacent about how secure our savings are in the bank. While it is unlikely that a country like the UK or Germany would allow a major bank to fail, there is a level of risk with smaller banks and those in the weaker southern European countries. They do have depositor compensation schemes in place, but it would remain to be seen how long it would take for them to repay depositors if a bank failed.
One lesson we learned from 2008 was that every investor should ask their adviser, bank or life assurance company to prove exactly how they are protected, and to what extent, in the event of institutional failure. You can then understand the risks and decide accordingly.
Within Europe the level of investor protection from institutional failure varies significantly between each country and between the type of institution – e.g. bank, insurance company etc. The difference can be significant; protection can be as low as nil. Luxembourg, on the other hand, offers one of the best investor protection regimes – its state controlled protection law is designed to provide maximum security to investors without limit. If you have an investment bond issued by a Luxembourg regulated insurance company, your investment assets are completely protected from the failing of the insurance company.
In all cases you should seek professional advice from an authorised advisory firm such as Blevins Franks Financial Management Ltd.
Blevins Franks Financial Management Ltd is authorised and regulated by the UK Financial Services Authority for the conduct of investment and pension business.
By Bill Blevins, Managing Director, Blevins Franks
Home repossessions are on the increase.
The government has accepted to reform the code of civil procedure to raise the threshold for salaries that cannot be seized when executing a mortgage in order to protect low income families and follow through with a proposal from the IU-ICV parliamentary group.
With the new legislation, pending final approval, the minimum salary limit that will be untouchable even when someone’s salary is seized for failure to pay a mortgage will be raised to a level 10% above the minimum inter-professional salary. In other words, whatever happens, such people would be left with 696.60 euros per month. This figure is increased by an extra 20% for each additional family member under their responsibility.
In practice, this means that if a bank has repossessed your home but you continue to owe the bank money, it will only be able to “take” the part of the salary you earn each month over this amount. For example, if someone earns 1,200 euros per month, the bank will be able to take 504.40 euros and leave them with 696.60 euros. If that person has a family member for whom they are responsible, the bank would have to leave them with 836 euros and 975 euros if that person was responsible for two family members.
Remember that in Spain, if someone has their home repossessed and the sale at auction of the property does not cover the mortgage, they continue to owe money to the bank.
WHAT HAPPENS IF I AM UNABLE TO PAY MY MORTGAGE?
We are living in unprecedented times and there is tension in the air. No-one can be sure of anything anymore and what was once unthinkable (not being able to pay the mortgage) is unfortunately becoming commonplace nowadays. With the constantly rising Euribor and increasing number of redundancies, paying the mortgage is moving away from being simply a chore towards becoming impossible. When we ourselves reach that situation, what can we do?
If you are unfortunate enough to be one of those people being suffocated by their mortgage and who cannot meet their monthly repayments, it is essential you read this before taking any decisions. The first think you need to know is that stopping to pay the mortgage would be an incredibly bad idea; far from ending the problem, you would only be aggravating it. From the moment you first fail to meet a repayment, the bank will remind you it is obliged to collect your debt and you can rest assured it will do so eventually. It will start out nice and politely at first but, over time, will eventually move from words to actions. If the situation is not resolved within a few months, it will ask the courts to initiate a process to auction your house and guarantee itself the collection of the money it lent you.
Be warned however, the auction of your property does not always put an end to the problem. If the bank is unable to settle your debt, you will continue to owe it money. To settle your mortgage, it is not simply enough to hand over the keys to your home to the bank. That system, which has grown exponentially in the United States, is not how things work in Spain. Here, when you sign a mortgage, you are subject to personal repayment. In other words, if the bank cannot cover the debt you hold with it by selling the house, it will continue to demand repayment of the remaining amount and could even partially seize your salary until it has recovered all the money it lent you.
THE PROCESS STEP-BY-STEP
Month one
After the first missed repayment, the bank will call you to rule out the possibility that there has been a misjudgment or error on either part. If you meet the repayment, plus the delay interest for the corresponding days since the repayment was due, the problem will end there.
Between months 2 and 5
If you accumulate between 2 and 5 months of missed repayments, the bank will do everything within its powers to make you pay. If it fails, it will make an appointment with you to negotiate changes to your mortgage conditions. It will ask you for proposals to pay less and will study their viability in an attempt to reach an agreement. Extending the term of the mortgage or paying the interest only for a certain time, are the most commonly used alternatives. If you have already reached this stage, you will now have several months’ worth of delay interest to pay, meaning your debt will have grown.
During this period, an important event takes place at the bank: if you do not pay, the entity must make provisions for your debt on its balance sheet. In other words, it must reserve monies equivalent to your credit, in accordance with regulations from the Bank of Spain. That money does not leave the bank but is “frozen”, let’s say. At that moment, you become a problem for the bank, whereas before you were simply a pain.
Month six
After, approximately half a year and once the bank has made written demands without a response from you, the bank will then consider recovery of the loan through ordinary channels as difficult. Therefore, the entity will execute your mortgage, which is nothing more than asking a judge to activate the guarantees you all signed in front of a notary public when you signed the mortgage papers. It is still possible for you to resolve the problem at this stage by paying everything you owe plus the delay interest, which will be adding up all the time.
After a year or a year and a half
The judge will set a date for the auction of your property. Until almost the very day they auction your property, you can still pay the debt and the corresponding delay interest (which will be quite considerable by now) and put a stop to the process. If you do not, you will reach a critical and painful moment: your home will be auctioned and you will be forced to leave.
THE AUCTION OF YOUR PROPERTY
Once the auction of your property has been appropriately announced, the auction itself will take place. The property will be put out to auction for the sum you owe to the bank plus the interests and other costs that may have been incurred to date.
It is possible that the property will not sell at the first auction, meaning the process will be repeated and could even be put out to auction with no reserve price for people to make whatever offer they want. If it does not sell, the judge will tell the bank what to do but the bank could keep the property even though your debt has not yet been settled.
If the property does get sold during these process, one of two things may happen:
1) the money obtained is more than the debt plus the costs, in which case the bank will settle, collect the debt and return the surplus money to you.
2) the debt is not covered, in which case the bank will keep the money from the sale but you will still have an outstanding debt to settle with your bank and it will come after you, and more importantly, after your guarantors should you have made use of any when you signed your mortgage. In this process, the judge must determine the best course of action to settle the outstanding amount. A decision may be taken to seize other assets that you own, those of your guarantors, part of your salary, etc. The objective of the bank will be to recover the money it lent you and that it was unable to recover through the sale of your home.
Credit: Fuster & Associates
The Bank de España wants to reduce banks’ property portfolios.
The Banco de España (bde) has asked a large number of banks to undertake an impact test for their residential properties and other real estate assets in order to draw up a new strategy, based on provisions whose purpose is to ensure banks and savings banks sell their residential real estate as soon as possible.
The regulator is in favour of banks offloading their residential properties as soon as possible, and is considering increasing the pressure by raising the minimum amount banks and savings banks must hold in provisions for property assets. In contrast, it could ease the rest of the provisions, such as default ones.
For some time now the idea that the Banco de España may raise the minimum required provision to 30% of a property’s value, if it has been held by the bank for over two years, has been circulating in the market. This is something that some banks already do, but the Banco de España has sent the test s in order to decide whether or not to make the provision obligatory. The bank is also considering raising the provisions for longer-term and/or problematic assets to over 30%. At the present time banks must set aside 10% of a property’s value during the first year it is on the bank’s books and 20% in the second year.
The final objective of all the measures is to penalise the banks which have real estate on their books to encourage them to sell the properties, as this is one of the issues that generates the most distrust and lack of confidence in the banks´ soundness. According to bank data, the financial sector has 165,000 million euros in problematic real estate assets, of which around 60,000 million are for repossessed real estate or land.
Credit: Fuster & Associates
Note: If this is the case, then will we see the banks doing more to avoid repossession of properties or will the banks start accepting much lower offers on properties, in order to reduce their substantial portfolios? Either will do, the former, if you are a home owner under pressure or the latter for an investor. However, even with the multitude of properties available, why is it that first time buyers still cannot get a foot on the ladder? Perhaps the government in co-operation with the banks should be looking at that sector to move the property market along.
Property Market
Mortgage floor: 29% of mortgages have a minimum interest rate.
29% of mortgages taken out by Spanish families to finance the purchase of their home are subject to a mortgage “floor”, which means that when interest rates fall to a certain level, usually to below 3.1%, they do not benefit, according to a study drawn up by the Banco de España at the request of the Senate.
The Banco de España recognises that financial institutions use theses clauses to recover “the minimum costs generated by these products when interest rates change sharply”, and therefore it believes that “they are a factor which promotes financial stability, something which is in the public interest”. For this reason it affirms that “as long as the clauses are written in a clear, understandable way, they must be considered to be freely agreed upon by the parties” and “it would not be appropriate to classify them as unfair.”
The study found that 13 of the 49 banks which took part in the study systematically include this type of clause in their mortgages. Of these, 4 do not include a mortgage “ceiling” to protect clients against interest rate increases. Furthermore, the others admit that “in the majority of cases they do not provide individuals with effective protection against the risk of a rise in interest rates, as the mortgage ceilings are very high.”
Credit:- www.spainsolicitors.com
Fuster & Associates
Rise in Spanish IVA
From the 1st July, 2 of the 3 categories of Spanish VAT will rise.
16% to 18%
7% to 8%
4% (is to remain the same).
What does this mean for the Spanish Property market which is already struggling to survive the current climate?
It will certainly increase the cost of buying and selling property and obtaining a mortgage in an already crippled market.
What is the government thinking?
Of course it will generate income for them but may push the market further backwards and no doubt they are hoping that prices will fall still further and generate increased interest from buyers and steady the industry but at what cost? More likely it will force more builders, promoters and agencies out of business with knock on job losses. The banks will come under further pressure and there will be many owners caught in the trap of having mortgages far greater than the value of their property causing an increase in repossessions as people struggle with their own economic crisis, losing jobs and putting more people on the bread-line.
Then there is the knock on effect for furniture and electrical companies and many other suppliers with steady drops in sales already recorded.
Buyers and Investors
No doubt there are people watching the situation with interest and for the general buyer now is the time to buy a property before the IVA increases and with so many properties available at low prices.
For the investor, they will probably sit it out and wait for rock bottom distressed sales and then pounce as the drop in price will by far outweigh the increase in purchase costs.
With the pound rising against the euro, buying a property is looking even more attractive.
Mortgages
As the banks continue to come under pressure they will negotiate on distressed properties in order to clear their overflowing books and are currently making mortgage offers which pre crisis would be unheard of.
If you have the money now is the time to buy Spanish Property.
Admin: 5 May 2010
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