SpanishPropertyBuyer.com

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:-

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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

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

www.spainsolicitors.com

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

www.spainsolicitors.com

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.

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

From the 1^st 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

Euribor, the interest rate normally used to calculate mortgage payments in Spain, rose 0.8% in April compared to the previous month, taking it back to 1.225% where it was in February. This is only the second time Euribor has risen on a monthly basis since September 2008.

Despite the rise in April, the Euribor is still just a fraction above the record low it hit in March. It is still 31% lower than it was a year ago and 77% lower than it was in July 2008.

Because Euribor is still lower than it was a year ago, repayments on a typical annually resetting mortgage (120,000 Euros, 25 years, Euribor +0.8%) will fall by around 41 Euros a month, or 420 Euros a year.

Many experts think that Euribor has fallen as far as it can and expect rates to start rising modestly. It won’t be long now before borrowers starting seeing their monthly payments rise, albeit a small amount.

Euribor is based on interest rates set by the European Central Bank. Base rates are currently at 1% but are expected to rise gradually during the course of 2010.

New mortgage lending

New mortgage lending rose 8.5% in February compared to the same month last year, according to figures from the National Institute of Statistics (INE). That is the second consecutive month of growth in mortgage lending, a good sign for the market.

On a monthly basis there were 54,813 new mortgages signed in February, up 6.2% compared to January.

The average loan value was 118,185 Euros, a fall of 4.6% compared to last year. Overall new mortgage lending was 6.478 billion Euros, up 3.5% on last year.

The average interest rate was 3.97, 26.5% below a year ago, and 2% lower than January.

95.7% were variable rate

Foreclosures also on the rise

Mortgage foreclosures increased 59% last year, up to 93,000, according to official data from the judicial system.

Mortgage foreclosures have progressed as follows in the last few years:

2009 – 93,000
2008 – 58,500
2007 – 26,000
2006 – 17,500
2005 – 15,500
2004 – 14,000

The greatest number of foreclosures last year were in Catalonia (18,000, 61% up), followed by Andalucía (17,700, up 55%), and Valencia (16,300, up 54%).

Credit: Mark Stucklin

www.spanishpropertyinsight.com

Cancellation  Of  The Loan, In Whole Or In Part, Is Penalized By A High Charge
A new ‘anti-switching’ clause ties mortgagees to their banks.

• § It’s called ‘Compensation for Interest Rate Risk’, and it’s been law since 2007
  § It penalizes those who wish to change banks by up to 5%, although there’s no legal upper limit
  § The borrowers affected have no room for manoeuvre: Once they’ve signed they can’t object
  § There’s been no public outcry: ‘This is just the beginning. There’ll be more of it for sure’

Times change and with them the clauses and mortgage charges, used by banks and savings banks. Following upon the famous ‘mortgage rate floor’ clause, the latest to become fashionable has been the so-called ‘Interest Rate Risk Compensation Clause’. A new, and completely legal, ace up the sleeve which some lenders are including in loans mainly to prevent their customers from taking their mortgages to other banks or savings banks.

The penalty, included in Chapter I V of the 2007 Mortgage Act -and therefore only affecting mortgages taken out after that date-, has begun to make its appearance in some deeds drawn up in recent months. Its sudden emergence coincides with plunging interest rates and the fierce competition between lenders to get the highest number of existing mortgages onto their books.

Credit:-www.spainsolicitors.com  - 9 February 2010

Not a lot of people know that if you buy a property in Spain with a mortgage, and the property then depreciates in value by 20% or more, your lender can force you to stump up more collateral to guarantee the loan, even if you are up to date with your payments. With Spanish property prices deflating fast this is suddenly a potential issue for Spanish property investors.

Is it another malicious clause in the small print of the typical mortgage contract? Nope. This time it’s actually on the Spanish statute books, in the mortgage law of 1981, reaffirmed in a royal decree earlier this month. The law says that lenders can demand “additional guarantees” when the value of the collateral – the property – falls by 20% or more.

Property values have never fallen like this in Spain before, so a law that might have seemed harmless in the past, when falling prices seemed to be out of the question, is now making some borrowers nervous.

“The majority of properties bought 2 or 3 years ago are now probably worth 20% less than they were at the time of purchase,” says one expert, quoted in the Spanish press.

Fortunately, mortgage lenders do not really have an incentive to demand that the law is enforced. “If people are paying on time I doubt that lenders will be interested in doing something like that,” says the expert.

Furthermore, like many daft laws, it is highly ambiguous, and lenders would not have an easy time implementing it. “As well as being highly unpopular, there are lots of ways people could fight it in court,” explains an expert. “For example, they could argue it is the banks fault for over-valuing the property when they granted the mortgage.”

So, it may be just a theoretical risk perhaps, but still one worth knowing about.

CREDIT: – Posted May 22, 2009 by Spanish Property News

When selling your Spanish property you should always know what costs you will incur and what your liabilities are. It is advisable to use a solicitor, who should ensure that your legal and tax requirements are met and that there are no debts left on a property for the buyer to inherit and that the buyers are aware of their responsibilities regarding the purchase costs and any outstanding debts, such as mortgages.  A solicitor can act for both parties but always remember that you can question actions and decisions.

When a contract of sale and purchase is drawn up, make sure you read it thoroughly and understand it’s content and implications because it is legally binding. If your solicitor suggests that a contract is not needed because the completion is going to be very quick i.e. a matter of days, that is acceptable but ask the solicitor to ensure with the buyers that you will only be paying the following costs, capital gains tax, solicitor’s fee, estate agents fee (if applicable), plus valia, IBI for the current year and if applicable a portion of the outstanding utility bills/community charge, you do not have to pay Notary fees, they should be paid by the buyer. However, on occasion the seller has found that without a contract having been signed, they go to the Notary’s office for completion and have to pay half the Notary’s fees, either that or the sale collapses.

What are the costs when selling your property:-

Solicitor’s fee.

The fees vary from 500 – 1200 euros depending on the solicitor and the amount of work to be done. It is advisable to use a solicitor as they will take the strain out of the sale and ensure your liabilities in respect of Plus Valia tax and Capital Gains Tax are met and received by the appropriate authorities. If your solicitor is making the necessary annual tax return for you in Spain, then they will finalise your tax matters too.

Agents Fee.

If applicable you must pay the agent the fee agreed when they took on the sale. Again fee’s vary but remember they have to earn a living and their fee includes IVA and they have to cover costs of advertising, phone calls, client costs and tax before they earn from the fee.

IBI (commonly known as council tax or suma tax)

This is the annual cost levied by the town hall for council services. Whoever owns the property as of 1 January in the year of sale must pay this bill, unless an alternate agreement has been made.

Utility bills. (Electricity and water).

Usually the solicitor will work out a fair assessment of these bills and apportion the costs between parties if in the middle of a current payment period.

Community Charge.

A statement of account is obtained from the Community Administrators to confirm that the fees have been paid up to-date. If they are in arrears they must be paid beforehand or at the Notary from the proceeds of sale. If say the seller has paid 6 months fees in advance and is selling in the first month, then apportionment of the 5 months already paid will be included in the final settlement.

If the property has no community of owners then this is not applicable.

Capital gains Tax.

This figure is set by the government and for non-residents it is 18% of the difference between the purchase figure on the old deed and the purchase figure on the new deed. However, if the seller is non-resident that person may be going back to their country of origin and as such a set amount is payable at the Notary. That figure is 3% of the new purchase figure on the deed e.g. if the price on the deed is 200,000 euros then the immediate Capital gains Tax is 3% of 200,000 euros – 6,000 euros. That amount is given directly to the Local Tax office, the Hacienda but your solicitor can offset certain expenses against the tax i.e. original purchase costs, sale costs & agents fees but not furniture as many think. The Hacienda may take 6 months or more to look at the sale and sometimes makes a small refund but invariably nothing comes back as often the amount paid is less than the 18% due.

If you are resident in Spain, then other factors must be considered and these are:- how long you have had the property (over 3 years, then you can defer CGT for 2 tax years and pay no CGT if you buy another property within that period), your age ( if over 65 you pay no CGT). Otherwise the tax is calculated on a scale according to the length of time you have had the property.

Plus Valia.

This is the unknown tax to many, until they sell a property. Plus Valia is paid on all properties sold in Spain. It may be anything from a few hundred euros to thousands of euros depending on how many times the property has changed hands. If the owner has had the property for a number of years then the Plus valia may be high. Every property has a catastral value ( rateable value found on your IBI bill) set by the local council and the council use a formula based on the catastral value to assess how much they think the land value has increased since the owner first bought the property. A solicitor will obtain the Plus Valia cost or you can obtain it yourself by going to the council office with your deeds and your last IBI bill and tell them the date you will be completing and they will provide you with the amount payable. The Plus valia is payable by the seller and the buyer should ensure a retention is made in this respect or it will fall to them to pay it at a later date and they may incur interest and penalties.

Mortgages.

If you have a mortgage on the property you are selling, then this can either be repaid and your solicitor will deal directly with your bank to obtain a settlement figure (including the bank’s repayment costs) or the buyer can take over the mortgage and that will save money for both parties. Either way a representative from the bank will attend at the Notary’s office to receive payment or to execute a new mortgage deed for the buyer on behalf of the bank.

These are the costs which have to be taken into account when selling a Spanish property. In effect the final settlement figure will be calculated after their deduction.

If repatriating funds, then companies like Money Corp will generally give you a better rate than the Spanish banks. On large amounts it can run into thousands of pounds, so check out the possibilities before you act.

Editor:  October 2009