The purpose of this article is to shed some light on the obscure legal clauses you should keep an eye on so as to avoid rash decisions that may lead you to unpleasant and costly mistakes with a Spanish mortgage. In extreme cases, they may even lead you to lose your Spanish property as well as jeopardizing your assets held abroad i.e. in the United Kingdom or in the Republic of Ireland. More on this in my article Spanish Creditors Pursuing Debts Abroad.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of January 2012
Original article from 4th June 2.009
The following list only collates the ten most common abusive mortgage clauses, for reasons of space, but in fact you ought to be aware there are many more.
What is regarded as an abusive clause?
For a clause to be deemed abusive under Spanish law two requirements need to be met:
a) The clause must inflict harm on the consumer, whether financial or of some other nature. The consumer can either be a physical or legal person. It is important they are viewed as an end-user or consumer who is not knowledgeable on the matter.
b) The clause must benefit the professional who’s drafted the contract within a business relation. This professional will be either a company or professional acting privately or publicly.
Only a judge can rule if a clause is deemed as abusive. In which case, the clause will be lodged in a special registry of abusive clauses.
The following is by no means a closed list. I have only included the most frequent ones.
1. Collar clause. In Spain 95 pc of mortgage loans are of variable interest. Of these, the vast majority take the Euribor rate as reference. However, lenders can – and normally do – mark-up this rate with a spread. If the Euribor increases, so do your monthly instalments having to pay more; if it decreases, you ought to pay less; simple, right? Wrong!
This is when this nasty clause comes into play by which lenders secure themselves a minimum interest rate, a spread or financial cushion, which normally spans 3 – 4 pc. So even if the Euribor rate should fall below, you will still have to pay the said minimum interest rate. To put it simply, a fall in the Euribor rate will not benefit you, as you have a clause that locks up the minimum interest rate you pay a month and prevents you from paying less. In Spanish this clauses is known as “cláusula suelo” (collar clause or tracking mortgage in English). You can read further on the matter in my article Mortgage Collar Clauses Revisited.
EDIT May 2015: Spain’s Supreme Court in a landmark ruling of 9th of May 2013 has declared collar clauses as abusive and therefore null and void in all Spanish mortgage loans, unless expressly agreed to, going forward from said date. In other words, prior to the 9th of May 2013 collar clauses are valid for old mortgage loan agreements.
On the other hand to be fair, lenders cap the top Euribor rate at an average of 10 – 11 pc. So even if the Euribor surpassed those levels you would only be forced to pay the said rate. But quite frankly, if the Euribor rate ever hits 11 pc, paying a high mortgage instalment will be the least of the problems in the Eurozone. For this reason, one should reasonably expect the Euribor rate to remain relatively low as opposed to high. Meaning this collar clause has a negative impact on consumers at large on the long run on taking a Spanish mortgage loan. Lenders reap the benefits of this clause however. Which is why it has been regarded as abusive by judges; it had been sneakily devised to be one-sided. It is like playing with loaded dices, lenders always win regardless of the outcome.
This clause is the single reason on why so many borrowers realised unpleasantly a couple of years ago (when the Euribor fell to an all-time record low) that their mortgage repayments did not fall as much as they were gleefully expecting. In most cases, their monthly instalments simply didn’t budge despite the dramatic fall of the interest rate of reference.
You can shop around for another loan and swap over to another lender which doesn’t include this abusive clause. This clause is only included by an estimated 30% of lenders. So there are plenty of lenders to choose from which do not include them. Moreover with the Amended Mortgage Act recently approved by the Government it is now considerably cheaper to swap lenders as the taxes and expenses involved have been significantly reduced allowing the consumer greater freedom of choice. Choice is the ultimate luxury in life.
For the undaunted you may also opt for legal action against your lender. Many such class action lawsuits have been successful over the last three years in Spain. Judges are prone to rule in favour of consumers as they are deemed as the “weak link”.
2. Developer’s Subrogation clause. By law on buying off-plan, you can turn down a developer’s mortgage and take on any other mortgage that you may wish. In other words, you are not forced to take the mortgage the developer offers you. This may become abusive when you are charged 1 pc commission for cancelling a developer’s mortgage (and taking on another lender of your choice). This clause is abusive and a purchaser under Spanish Consumer Law should not pay for this expense (Additional Disposition number 10.22 of Law 7/98 LCGC). This is a classic example set out in Spain’s Consumer Act, Law 26/1984.
Notwithstanding the above, I must add that taking on the developer’s mortgage normally entails a borrower saving an average €3,000 or more in tax and associated expenses. So you should basically first do the maths to establish whether it benefits you to turn the developer’s proposal down and swap elsewhere or else accept it (subrogate in it; take the position of the developer before his lender).
3. Mortgage resetting rate. This particularly annoying abusive clause allows the lender to automatically reset the mortgage interest rate when the referred index increases (i.e. Euribor) but requires the borrower to notify the lender formally when the opposite takes place. This may not be a problem when you live in Spain but may become a real nuisance if you live abroad as you will surely skip the deadlines to notify the lender meaning you will not be able to benefit if the referred interest rate decreases.
A variant of this clause is the unique ability of lenders to react swiftly and efficiently to rises in the interest rate of reference in a mortgage loan but likewise show an inordinate inability should the opposite happen. Lenders would make a seasoned cheetah blush when it comes to their speed and agility in revising and resetting mortgage rates on a quarterly basis – if it benefits them – whilst a borrower can only reset his rate annually (providing of course they actually notify the lender in time in most instances…bit of problem mind you complying with a deadline if you happen to live abroad). What this means is that a lender can take immediate advantage of a rise of interest rates (charging a borrower more from the get-go) whereas suspiciously they prove themselves to be obtusely slow to react to a decrease in interest rates (meaning they would earn less as you would be paying less in your monthly instalments) and of course it falls on the borrower to nudge them to reset the rate in their favour. That is why it is abusive, because – again – it is one-sided.
4. Mortgages to be repaid within the next 40 years. This is not really an abusive clause per se, it has more to do with the mechanics of compound interest and the repayment method selected. As I explained in my article on Bank Repossessions in Spain from 2007, after having paid for 25 years a standard mortgage loan in Spain you will have mostly paid for the interests accrued on the capital not having repaid most of the capital itself. Most Spanish mortgage loans follow the French repayment system which, unlike the German system, has this particularity that one ought to be keenly aware of. Many borrowers, following this example, mistakenly think they’ve redeemed already half of the loan after 25 years, when the truth is that after a quarter of a century there is a substantial amount of the capital itself outstanding as they have mostly paid rolled compounded interests on the capital itself! That is precisely why on signing up for a mortgage you, on average, may end up paying double the asking price of a property on the long run (for decades-long mortgage loans). This particularity of the Spanish mortgage system is particularly aggravating for those who stop paying their mortgages, for whatever reason, as many defaulting borrowers fall in the believe that most of the capital has already been repaid when it is simply not the case. That is one of the main reasons why defaulting on a Spanish mortgage loan is such a serious matter, besides being personally liable with all your assets (both current and future, whether held in Spain or abroad).
5. Imposing the Notary at completion. A borrower has the freedom to choose any Notary to witness the signing of a mortgage loan. Any clause that imposes the opposite is null and void and may be disregarded.
6. Lenders’ bank charges for non-requested services which are tagged on to the mortgage loan. This occurs when on signing a mortgage loan a lender throws in a bunch of unrequested services such as life covers, home insurance, pension plans or non-requested credit cards. This is null and void as per Additional Disposition number 10.23 of LCGC.
Having said this, the reason why an offered mortgage loan may be so competitive in the first place is only because a lender has tagged these unrequested services which help them to offset the financial shortfall of the loan itself. On removing them, the lender will be forced to immediately raise the applicable interest rate as this interest rate was, in practice, not feasible (without incurring in a financial loss). It was merely a ‘bait’ to entice you to hire the whole range of financial services available – unbeknownst to you – (this is really where they will make a profit, not from the mortgage loan itself).
7. Clause rounding off to the nearest decimal point in variable interest loans.This clause will round off the figures in detriment of the borrower. This may not sound like such a big deal but when the lender rounds off the interest rate applicable on, for example, a €300,000 loan to be repaid in 25 years’ time this can translate into thousands of Euros which are unduly added in on repaying it. This has been forbidden as from the 22nd of November 2002 onwards (but some lenders still attempt to include it nonetheless).
8. Clause by which the borrower pays all legal fees on litigation. This clause means that if the borrower decides to take their lender to court, for whatever reason, no matter the outcome of the ruling they will have to pay not only for their own legal fees albeit additionally for the lenders’ as well (both lawyer and advocate). And bank’s lawyer’s fees are not exactly cheap…
9. Clause by which the lender, on the borrower defaulting one instalment, terminates the mortgage contract and initiates a full-blown repossession procedure. This clause is abusive and is fairly common in mortgage contracts. This may be highly unfair to the borrower as they may have defaulted or paid late one month for a legitimate reason, other than being penniless of course. The law allows for the borrower to mend his delinquency and repay the owed amount with the accrued delay interests. If after three months the situation remains unchanged the lender is legally free to initiate a formal repossession procedure.
10. Clause by which the spread is increased significantly. In a deflationary economic environment in which the Euribor rate falls to an all-time low, lenders that failed to include the above mentioned collar clause (point one of this article) may choose to increase the spread charged on (top of) the Euribor rate so as to offset the shortfall in interests.
E.g. from an initial contractual starting spread of 1 pc tagged onto the Euribor, they now raise it by two points to 3 pc plus Euribor on the rates being reset.
So on the right hand you are left with nothing and on the left hand nothing is right. Bottom line, you can call it one name or the other, but the effects for the borrower will be exactly the same as those described in the above first point of this article (collar clauses). So why on earth do this then? Because a lender can claim they are not evil by applying collar clauses to naïve customers when in fact they are applying something different, but with identical effects on a borrower’s pocket. It all hinges on perception; on how aware and financial savvy consumers are. As consumers eventually got wind (through the media at large) on the abuse of collar clauses, lenders swiftly jumped to increase the borrowing spreads so as to maintain the status quo without being portrayed in an unfavourable light by the media.
ADICAE (Spain’s Banks and Insurance Consumers’ Association) estimates that 97 pc of mortgage borrowers in Spain are unfamiliar with fundamental elements of their own mortgage contracts. Hopefully, by reading this article, you will have grown more financial savvy on mortgage loans and no longer be part of the said sad statistic.
So before you rush head-on to sign on the dotted line for a new relaxed life style under the sun, slow down and make sure it is first reviewed by an expert, such as a Spanish qualified lawyer or an experienced mortgage broker. Trust me, their advice will be worth every penny.
“A banker is a fellow who lends you his umbrella when the sun is shining, but wants it back the minute it begins to rain” – Mark Twain.
American author and humorist.
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2.009 and 2.012 © Raymundo Larraín Nesbitt. All rights reserved.