Bank valuations vs. market value

Raymundo Larraín Nesbitt, April, 10. 2018

Lawyer Raymundo Larraín explains the difference between both concepts as they are often confused by non-residents. He also ventures the start of a new expansionist super cycle in some areas of Spain.

Article copyrighted © 2018. Plagiarism will be criminally prosecuted

By Raymundo Larraín Nesbitt
Director of Larraín Nesbitt Lawyers
8th of April 2018

 

 

Introduction

The Spanish property market has been a roller coaster over the last decade. From the dizzying heights of 2007 to the gut-wrenching lows of 2011. Over the last 15 years bank valuations have compounded this erratic behaviour exacerbating it. When property values were high, lenders overvalued properties by a long shot; when property values fell, lenders undercut property values even well-below their current market value.

I have been prompted to write this article on the back of low bank valuations which have nearly botched a series of conveyances I have been recently involved with as demand for Spanish property remains unabated. If you are an industry insider, you may want to skip this article altogether because it would be like teaching granny to suck eggs. This article is aimed to be read by neophytes who are largely unaware of how things work in Spain. I thought it would be a good idea to shed light on two points as I keep having to explain them to clients.

Firstly, to dispel a common blunder between non-residents that Spanish bank valuations are a true reflection of a property’s market value at any given time, which is simply untrue.

Secondly, why bank valuations seem to be always so out of touch with reality never seeming to match the real market value.

  1. Bank valuations are NOT a reflection of a property’s market value

One of the first things I was taught in Economics 101 at university, is that the price of a good is always determined by the intersection of demand and supply at any given moment. In other words, prices of goods and services fluctuate over time in line with demand and supply.

A property that was worth one and a half million euros at the peak of the market, can now go for €900,000. But it may have fallen as low as €700,000. So, what is its real price? Is it 1.5m, 900k or 700k? The ‘real’ price is what someone else is willing to pay a vendor at any given moment. If you can find someone willing to pay 1.5m, that is its current market value.

Bank valuations however do not reflect real market values. They are devised for a mortgage loan application and often are calculated for the purposes of an auction value (in the event of a bank repossession).

A common occurrence is for a foreigner to agree to buy a property for say €500,000, apply for a mortgage loan and then be upset to find out his lender values the property at ‘only’ €400,000. The buyer feels cheated at the €100,000 shortfall and becomes angry with the vendor, estate agent and even with the lawyer!

Bottom line, Spanish bank valuations are NOT a reliable assessment of a property’s current market value. 

  1. Why are bank valuations so out-of-sync with the market value?

Lenders, believe it or not, have their own vested interests which at times (read frequently) are misaligned with a borrower’s interests. Lender’s valuations serve a purpose: the bank’s purpose, not yours.

  • Why were properties overvalued during the property bubble haze? In the early two thousands the then Chairman of the US Fed, Mr Alan Greenspan, flooded the financial market with cheap credit on slashing interest rates. He inundated the financial market with cheap credit. This prompted a credit bubble of gargantuan proportions which led to a house of falling cards with which we are all too familiar. Back in the day, it was in the best interests of lenders to overvalue properties well-above the accepted market price so that borrowers borrowed as much money as possible (read up to their eyeballs) to over-indebt themselves. This (reckless) credit policy led banks to profit from huge gains in the short-term (at the expense of the mid to long-term growth). Basically, anyone with a pulse qualified for a mortgage loan. In my opinion self-certified mortgages exemplified like no other this ‘irrational exuberance’ (credit furore) at the start of the new millennia.
  • Why are properties so undervalued now in 2018? Lenders suffered great losses post 2008 leading to hundreds going under. Many were forced to request state-backed loans to prop up zombie balance sheets. The Spanish government bailed out several banks but imposed harsh repayment terms in exchange. The slow and painful readjustment of the banking sector - which still endures a decade on - led to merges and acquisitions, tighter credit regulations and also to laying off dozens of thousands of bank employees and forced early retirements. As a result of this state-imposed downsizing, lenders are now ultra-conservative on their lending criteria and value properties prudently (read undervalue them significantly). The interest of lenders now, a decade on, is the opposite; to only lend money restrictively to creditworthy customers which actually have the ability to fully repay mortgage-backed loans. This goes on to explain why lenders nowadays purposely (under) value properties well-below the current market value, because they wish to spread the loan risk and force would-be borrowers to pay a larger percentage of the property’s value out of their own pocket. In the event of a default, a bank wouldn’t lose as much.

 

Conclusion

Buyers should not be shocked if their chosen lender values the property they are buying 25 - 35% below the agreed asking price. Bank valuations are simply a reflection of a lender’s credit policy, nothing more; which currently is ultra-conservative in the aftermath of the banking collapse of 2008 (The Great Recession).

What really matters on buying is that the property you are purchasing can be resold later on for a higher price. That is what should concern you foremost. Asking rental prices and capital appreciation underpin any sound financial investment. Spain's real estate market seems to be staging a comeback in full swing on both accounts according to the latest macroeconomic figures.

Asking rental prices are soaring by two digits year-on-year as reported by experts. The exact figure remains contentious, as some prestigious media, like El Pais daily, quote a 21% annual increase whilst others, such as El Mundo daily, estimate the national average rental increase to be at 10.2%. In any case, minutiae aside, the consensus is clear and unanimous that we are witnessing a whopping two-digit rental growth in asking rental prices year-on-year. Nothing short of a new rental bubble. I analyse this new lease frenzy in my article Holiday Home Taxation in Spain. Nothing short of a new rental bubble.

Capital appreciation is quickly catching up with the above figures. After having reached all-time lows in 2011, properties in Spain are gradually picking up the pace seven years on (abetted by historic ultra-low interest rates which translate into cheap mortgages). Although Spain’s real estate market remains largely fragmented in a two-speed recovery, with some areas steaming ahead whilst others sluggishly trail behind, there is a reported one-digit year-on-year gain across the board. And even stunning two-digit capital appreciation year-on-year in selected areas with prime beachfront locations as well as in large Spanish cities such as Madrid (17%), Palma de Mallorca (14.7%) and Barcelona (11%); source TINSA. Some bold economists and rating agencies (Fitch) are even predicting the start of a new property bubble

The average rental yield in Spain can be expected at 5% pa (dependent on location). If to that you also add the potential of capital appreciation, Spanish real estate is poised for combined two-digit gains over the next years easily trumping alternative investments and paltry fixed returns in a context of historic ultra-low interest rates.

If one thing remains constant in Spain’s ever-changing property market is that it is cyclical (roller coaster metaphor). Hard data suggests we are geared towards a new expansionist super cycle.

Can you afford to miss out?

Buying property in Spain? Our law firm has over 15 years' experience dealing in conveyance transactions nationwide. Deal only with native English-speaking lawyers and economists, we will be very pleased to discuss your matter with you.

The thrust of my whole article can be neatly summed up in the wise words of a great American writer.

“A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain.” – Mark Twain.

American writer, humourist, entrepreneur, publisher, and lecturer. Among his novels are The Adventures of Tom Sawyer (1876) and its sequel, the Adventures of Huckleberry Finn (1885).

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyance, taxation, inheritance and litigation.  You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Article originally published at Spanish Property Insight: Bank valuations vs. market value

 

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Conveyancing-related articles

House Hunting in Spain – Interview with The New York Times. June 2015
Buying Property in Spain from a Private Seller (Resale Property) – 21st of February 2017
Buying Property in Spain from a Developer (Off-Plan Property) – 8th March 2017
How to inspect an off-plan property overseas – Q&A with The Sunday Times. July 2017
Buying Property in Spain – 10 Reasons to Hire a Lawyer – 8th November 2016
Non-Resident Taxes in Spain – 8th December 2015
Non-Resident Income Tax – 8th December 2017

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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PERSONAL BANKRUPTCY IN SPAIN: Second Opportunity Law

Raymundo Larraín Nesbitt, September, 8. 2015

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of September 2015

 

Introduction

In 2003 law 22/2003, Ley Concursal or Insolvency Law, was passed which updated Spain’s outdated insolvency procedure. The previous laws, which were intended as ‘temporary’ were from 1885 and 1922. The timing of the law couldn’t have been better as shortly after its approval Spain’s economy would take a severe downturn driving thousands of companies into insolvency.

This new law has undergone over two dozen amendments in such a short span of time. Some of these have been major to assist it to adapt to reality as the law was not working as intended. In theory the mission statement of this law is to save companies that file for creditor protection helping them to exit receivership and trade again normally.

In practice it works out very differently. Whereas, for example, in the US 95% of companies that file for creditor protection manage to come on top within a three-year period, in Spain 95% of companies end up being liquidated within the same time frame. In Spain filing for creditor protection is almost a guaranteed corporate death sentence. This trend must be reversed.

Despite this well-meaning law the shortcomings are clear. The major culprit of Spanish companies going under, once they have filed for protection, are the privileged credits held by the Tax Office and the Social Security. These single-handedly strangle financially ailing companies forcing them into administration. It is clear to my mind that the iron grasp held by both institutions must be released if struggling companies are to continue trading successfully. Companies create wealth, jobs, services and products not to mention they contribute paying taxes. It is in Society’s best interest to protect and save them where possible. The failings of this law should be addressed by lawmakers assisted by professionals on the ground. 90% of Spanish companies are SMEs and find themselves unable to endure repayment of these privileged creditors should they file for insolvency.

Amidst these changes was February’s Royal Decree 1/2015 popularly dubbed as ‘Second Opportunity Law’. This law focuses on private individuals, not companies, filing for creditor protection (bankruptcy). The change was spurred in a conference of lawyers when a speaker pointed out that struggling borrowers in Spain echoed Sisyphus’ myth. Like the myth, some individuals face the daunting prospect of facing a mounting debt, with rolled-up interest, creating a ceaseless debt spiral of which there is no escape. The intention of this law was to put an end to the gridlock by cleaning the slate and allowing borrowers to restart anew. Or at least so goes the theory.

In practice however there are serious repercussions which borrowers ought to ponder which may even dissuade them from taking this route; at least until the law is amended.

 

Second Opportunity Law

 

The conditions to benefit from it are laid out in Art. 178 bis of Spain’s Insolvency Act. To file for (personal) bankruptcy one must do so before a Mercantile court in Spain. The procedure will be overseen by a Mercantile judge. A private individual must meet the following requirements:

1. Physical person.
2. Must have filed previously an insolvency procedure. The procedure concludes outstanding debts & liabilities outstrip assets.
3. The insolvency procedure must have concluded the borrower is not guilty or at fault. They must be borrowers in good faith. Good faith is the leitmotif that pervades throughout the Second Opportunity Law. Creditors will clutch at any crevice to overturn this principle and portray a borrower in a different light so as to disqualify him for this creditor protection.
4. The borrower must not have been convicted by a court ruling of a catalogue of economic related crimes within the previous ten years.
5. The borrower must have tried reaching an out-of-court settlement with its lender, creditors.

Options

Two options fan out at a borrower’s choice.

1.- Option A

The borrower pays the credits against the mass as well as all privileged credits. Those regarded as privileged are lenders (i.e. mortgages), Tax Office and Social Security. Note that privileged credits must be repaid in full regardless.

The upside is that ordinary credits, those held by family members or friends, only have to repaid up to 25%. The remaining 75% is condoned legally.

2.- Option B

The borrower submits himself ‘voluntarily’ to a draconian five-year repayment plan which takes into account the individual’s income and debt amount; it is a tailored plan.

• The first requirement is that the borrower proactively assisted in finding a solution.
• The borrower must not have attained this privilege previously.
• The borrower must have actively sought job placements (and be able to prove it).
• The borrower’s name will be lodged in a public insolvency registry for the next five years.
• The borrower must continue to pay alimony, where applicable.
• The borrower must continue to pay privileged creditors, as listed in the point above.

The result is that after the five years have elapsed all ordinary and subordinate outstanding debt will be cancelled.

However, debts owed to privileged creditors will remain outstanding in full:

• Mortgage debt (lenders).
• Unpaid taxes plus interests (Tax Office).
• Unpaid wages (Social Security).

Repeal

Both options can be jeopardized by a borrower on any of the following:

• Breach of any requirement. The observation of all and any requirements is stringent.
• Non-payment within the repayment time frame of any amount. This automatically invalidates the good faith requirement.
• Discovery by the court of concealed assets or non-disclosed sources of income i.e. working off-the-books when on the dole.
• Significant improvement of financial situation i.e. beneficiary of an inheritance.

Conclusion

Debt-laden borrowers may want to think twice before taking this route.

Despite the hype I have read in the press, hailing this new law as the perfect solution to many’s ongoing financial tribulations, the truth is far from it.

The key point is that the debts which are written off are those classified as ordinary or subordinate; which normally belong to friends and relatives. Meaning that those who trust and love you more are the ones that will bear the brunt for you.

In sharp contrast, privileged creditor’s debts (lenders, Tax Office, Social Security) remain as is. Not a cent will be condoned and will have to be repaid in full. This is what’s misunderstood at large.

In other words, to save your own financial situation you will be alienating yourself from those that love and care for you the most. Besides, on following this route your personal details will be listed at the Civil Registry for any to see. And these are not erased. You will become a financial pariah which consequences will last throughout your lifetime in Spain. Lenders will be highly reluctant to lend you money again, whether as a personal loan or to start a new business. So much for ‘second opportunity’.

Which is why in my opinion, and that of others more qualified than myself, filing for personal bankruptcy in Spain should be taken only as last resort when all other venues have been exhausted. In fact, only 1.65% of bankrupt people chose this path in so far this year (one in fifty).

Some privileged creditors (read lenders) are walking away scot-free when in many cases they were the culprits on creating this situation in the first place by offering recklessly loans to borrowers that clearly did not meet the minimum requirements in the heyday of the property boom. They directly contributed to the current situation and should be held co-responsible, sharing in the losses of their own making. Accountability shines for its absence.

For those that have reached a nadir in their financial situation, and seek a second opportunity, you may want to think twice before taking this option. Whilst I am a firm believer in giving people a second chance in life, you may want to sit this one out; at least until the law is amended and lenders bear too the consequences of the folly of the roaring 2000s.

 

La elección no depende solo de la voluntad, sino de la posibilidad.” – Spain’s Supreme Court.

Loosely translated as: “Choice doesn’t hinge solely on one’s own will, albeit on opportunity.”

Acknowledgements

I am especially indebted to Ms Catalina Cadenas de Gea, Judicial Secretary of Málaga’s Mercantile Court Number Two, for her invaluable input on writing this article. Gracias.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing, taxation and inheritance. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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Bad Debtor’s List (‘Fichero de Morosos’)

Raymundo Larraín Nesbitt, April, 8. 2014

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of April 2014

 

Introduction

Spain has ‘technically’ exited its seven year recession. However, the financial aftermath continues to look grim for most of the population (with the exception of our political class, of course). As a consequence, over 100,000 people are added each month to Spain’s dreaded bad debtor’s lists.

This article explains how you may be included in one of them (even unbeknownst to yourself!), the severe financial consequences this has (in Spain) and how to remove yourself from a black list.

What is a Bad Debtor’s List?

In Spain companies will include you on non-payment in a bad creditor’s list such as EXPERIAN, ASNEF or RAI which has dire consequences as it adversely affects your credit score and by extension hampers your future borrowing ability.

You may think that the people who are normally included in debtor’s black lists are in most cases professional non-payers or maybe families hit by the brunt of Spain’s financial downturn. However you would be surprised to learn there are multiple cases reported in which a person with a spotless credit track record is included out of spite by a company as a result of a legitimate dispute over a questionable invoice. At other times it may fall down to something as clumsy as a careless oversight on paying a service.

Examples:

  • Your telephone company charges you €800 for roaming fees on a five-day trip to Egypt. Your mobile was switched off all the time. You refuse to pay until they give you an explanation. The mobile company declines explaining and blacklists you immediately.
  • Your electric supplier increases your bimonthly invoice by 20% without providing a justified reason. You refuse to pay and are blacklisted as a result.
  • You fail to close properly a Spanish bank account, or forget to top it up regularly, and slip into the red. The bank will blacklist you after a couple of months. Lenders take legal action for non-payment spanning between 3 to six months after the first arrears.

 

Consequences of being included in a Bad Debtor’s List

These consequences are financial and will severely hinder your borrowing ability in Spain, or elsewhere, in the near future. On being included in a black list you may be turned down on some or all the following:

  1. Personal loan
  2. Business loan
  3. Mortgage loan
  4. Consumer loan e.g. cards from major high street retailers that allow you fractioned or deferred payment over the next months. Kiss goodbye to your “El Corte Inglés” card.
  5. Credit card application
  6. Barred membership by selected retailers i.e. gyms, video clubs, golf clubs

Amount of the Debt

There is no minimum amount. Less than €100 warrants you being blacklisted.

Duration of the Inclusion in a Debtor’s List

The duration normally spans six years. After said time your details should automatically be removed by the registry.

What happens if I am not notified of my inclusion in a Bad Creditor’s List?

This is an entitlement. Failure to comply by the registry gives you good legal grounds to request a cancellation and a full withdrawal from the debtor’s registry. In practice this may be more difficult than I make it sound and you may need a lawyer to assist you.

Removal of a Debtor’s Registry

Paying off your debt will not have you automatically removed from a debtor’s registry. You must proactively pursue your own removal or else appoint someone qualified to do it on your behalf i.e. a lawyer. The whole procedure will only be carried out in Spanish language.

The Four Steps to remove oneself from a Bad Debtor’s Registry in Spain

  1. Pay off the outstanding debt which triggered your inclusion in the debtor’s list in the first place. Keep evidence substantiating the debt is fully settled (receipt, bank transfer, correspondence with the creditor etc.)
  2. Contact (in Spanish) the registry which have you black listed. Request a cancellation request form (“solicitud de cancelación”, in Spanish).
  3. Complete the form in Spanish supplying the registry with all the necessary evidence that unequivocally demonstrates the debt is now settled. You will have to send all by registered post (“burofax”) along with a copy of your passport / DNI (national ID card). The register will contact your creditor to confirm the debt has been settled to their satisfaction (there may be interests accrued or penalties that also need to be paid besides the principal itself).
  4. Once a registry has concluded their own internal investigation they should remove you within the next 30 days.

Conclusion Bad Debtor’s List (“Listado de Morosos”)

Spain’s ongoing delicate financial situation pushes families to the brink. The inclusion in a debtor’s black list may not be an issue if you are non-resident in Spain but becomes a serious matter for those holding resident status as it will seriously hamper their borrowing ability as well as being an overall nuisance in their day-to-day life.

I strongly recommend you to avoid an inclusion in such lists. And if you do happen to get included, a lawyer – for a reasonable fee – can help you to clear your good name by cutting through the red tape and language barrier in an expedient manner.

I spent a lot of money on booze, birds and fast cars. The rest I just squandered” – George Best.

Northern Irish professional footballer. Winner of the European Cup with the Manchester United in 1968.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance, and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

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Raymundo Larraín Nesbitt is a property-specialist lawyer based in the UK qualified to practise in Spain

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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Mortgage Collar Clauses Revisited (‘Cláusulas Suelo’)

Raymundo Larraín Nesbitt, December, 8. 2013

The purpose of this article is to raise public awareness on collar clauses as many struggling borrowers in Spain are still being abused by them in 2013 when Spain’s Supreme Court has ruled them out as null and void.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of December 2013

 

 

 

Introduction

I have been asked to revisit the subject of collar clauses (‘Cláusulas Suelo’, in Spanish) in light of Spain’s recent Supreme Court rulings. When I first wrote on the matter, back in 2009, there was no jurisprudence whatsoever. I felt at the time compelled to write and denounce these mortgage clauses publicly as I regarded them as abusive due to their one-sidedness in favour of lenders. They were an accident waiting to happen. So much so that in my article on 10 Common Abusive Clauses in Spanish Mortgage Loans I gave them the dubious honour of listing them in first place. I should have also added SWAP clauses to it.

Five years on, rulings against them are a daily occurrence that no longer makes the headlines. Spain’s Supreme Court has now established in 2013 a line of uniform jurisprudence on the matter declaring them null and void across the board as from the 9th of May 2013 onwards.

Abusive Clause: Definition

Spanish law requires two conditions are met for a clause to be flagged as abusive:

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.
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.

Collar Clause: Definition

Is an arrangement in which the maximum limit (ceiling or cap) and/or the minimum limit (floor) in a loan is fixed.
In theory is a financial service that is tagged onto your loan whereby if the interest rate to which the loan is referred to (normally Euribor plus a spread) exceeds a capped amount you are charged only the capped amount (ceiling) saving yourself considerable money i.e. the official interest rate reaches 10% and your collar clause has a ‘ceiling’ set at 7%. You save yourself paying the difference (3%) on hiring this financial service.

Conversely should the interest rate fall too low you are likewise charged a capped amount (floor or ‘suelo’ in Spanish).

Collar clauses clearly fall in the category of an abusive clause for the reasons I explain below.

Insight into Collar Clauses

The idea of collar clauses on paper sounds all good and well.

In practice, they play out very differently. When lenders set out to mis-sell this financial service en masse in 2008 it was clear to anyone who followed the markets that the Euribor had peaked off in October 2008. Therefor benchmark interest rates indexed to loan agreements (chiefly Euribor for over 90% of variable interest mortgage loans) were bound to fall sharply in the ensuing months, not to increase. It is precisely at that moment in which lenders knew for a fact that interest rates would drop sharply that they set out to mis-sell a financial product that could only benefit a consumer if interest rates soared. Lenders and credit institutions merrily set off to mis-sell collar clauses to borrowers at large scaring them with apocalyptic double-digit scenarios. Mark Twain’s quote comes to mind: “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”.

Lenders took an unfair advantage over consumers through their superior financial know-how on knowing for a fact that the FED was leading a world-wide concerted strategy, in tandem with all key central banks including the ECB, to lower interest rates and pave the way out of the ongoing recession that started with the US’s subprimes in 2007. The likelihood of a return to double-digit rates was negligible; a chimera at best. Albeit trusting borrowers largely ignored this when they were flogged collar clauses as a panacea by lenders in 2008.

Lenders, on mis-selling this complex financial service to laymen, who were invariably not financially savvy, focussed the sales pitch on interest rates soaring and how much money a borrower saved on average on hiring them over the long-term. Fear always makes an attractive sales proposition.

Lenders were only too keen to conjure nightmarish visions of rising interest rates reminiscent of the eighties and nineties reminding borrowers that 10% interest rates were the historical average in Spain. Over-indebted borrowers, reeling in fear, were all too eager to rush on ahead and hire a collar clause like there was no tomorrow. In other cases these clauses were simply tagged onto mortgage loans unbeknownst to unsuspecting borrowers.

While it’s true that 10% is the historical average for interest rates in Spain this does not take into account the fact that Spain joined the Eurozone. This implied Spain losing its monetary policy in favour of the EU’s ECB. This brought as a result stable, low interest rates for the long-term. So a scenario of a 10% interest rate, so long as Spain remains within the protective mantle of the EU, is far-fetched and non-plausible. But few people care to think on such things, much less on hiring a financial service.

Lenders loaded the dice by drafting clauses where the collar clauses were set with a spread as high as 3 or 4% plus Euribor when the official interest rate was bound to plunge below one per cent (!). When interest rates (so very predictably) fell in the wake of the FED’s new Quantitative Easing monetary policy these clauses started kicking in. Borrowers simply failed to grasp how instead of paying less a month (as they had been repeatedly promised by lenders on flogging these collar clauses) were in fact now being requested to pay increasingly more!

My inbox as a result was deluged by aggravated borrowers over the ensuing months complaining on being overcharged by lenders. They were (mis)led to believe that dropping interest rates would translate to sharp cuts in their monthly repayments on hiring a collar clause. The harsh reality proved stubbornly the opposite. Not only did they not pay less, they ended up paying even more than they reasonably should have.

Additionally lenders worded loan agreements reserving themselves the right to revise and amend the applicable loan rate on a monthly basis (if it benefitted them) or else on an annual basis (it if benefitted the borrower). In other words lenders could swiftly react to any rate change that benefitted them (and so they did) as rates continually dropped to new lows whereas borrowers were only able to do it once a year, on average. As a result lenders were quick as a cheetah to amend applicable rates in loan agreements and slow as a tortoise if it benefitted a borrower. That’s fairly one-sided in my book.

Collar Clauses: Jurisprudence

Spain’s Supreme Court has only recently upheld in 2013, across multiple appeals raised by lenders, the nullity of such clauses i.e. STS 241/2013. The matter is no longer contentious as there is a string of like-minded rulings set by the highest court in the land which sets precedence over legal matters.

As a result Spanish lenders are (in theory) legally forced to remove collar clauses from their loan agreements. In practice, they are not so proactive and often would seem to adopt a complacent attitude overlooking such rulings.

Unlike in the UK, where lenders took an active stance mandatorily setting aside billions of pounds to compensate mis-selling PPI insurance covers, this is not likely to take place in Spain. Although UK lenders offer a (paltry) compensation, private claim companies can get you, on average, triple the amount you are initially offered. In the UK we have witnessed how PPI-claim companies have been setup with the sole purpose of claiming compensation on behalf of borrowers harassing prospective customers day and night with text messages.

Back in Spain, lenders are in no rush to compensate or remove such clauses. At no time are lenders going to volunteer offering borrowers any sort of compensation, unlike their UK counterparts. In practice lenders require that borrowers (or their appointed lawyers) claim proactively compensation and/or have collar clauses removed. Many borrowers, in my experience, were misinformed and remain blissfully unaware – even today – that their loan repayments are subject to a collar clause as they were tagged on by lenders unbeknownst to them as an ancillary non-requested financial service.

And this is precisely where lawyers come in to play; by stepping up to enforce the nullity in mortgage loan agreements or even claim compensation on behalf of customers, where applicable.

Are You a Victim of a Collar Clause?

If you think you may (still) be a victim of a collar clause you should not hesitate to contact your lawyer to revise your mortgage loan agreement. Several rulings declare these as null and void and you should at no time be overpaying as a result of them on monthly loan repayments.

You can of course attempt to cut out a lawyer saving yourself money by contacting a lender on your own, in Spanish of course. Any letters in any language other than Spanish will be binned, as it is logical.

In practice the route of cutting out a law professional seldom works as a borrower lacks the gravitas and leverage of a seasoned lawyer in the eyes of a lender to have a collar clause removed from your contract; much less to claim compensation.

You can arrange a free consultation with a lawyer to see if you are eligible. Once a lawyer determines you qualify (for collar clause removal and/or compensation) you may decide on whether it is worthwhile or not to hire them. You should look at the long-term on making a decision. It is foreseeable that the ECB will hold its interest rates low in the mid-term which in turn translates into the Euribor (not directly under the ECBs control) remaining low for a long period. Which means that you are going to be overpaying a lender for quite some time (years). A lawyer’s low fee amply justifies hiring him to have these cumbersome collar clauses removed. And if you are additionally eligible for compensation, all the better!

Spanish Mortgage Collar Clauses – Conclusion

It is a widespread financial product that was mis-sold by lenders at large in Spain. Unbeknownst to many borrowers, who are now struggling to make ends meet, they may be overpaying Spanish lenders on their monthly (mortgage) repayments when legally they should not. Moreover, they may be even entitled to compensation!

If you think you may be a victim of a collar clause you should contact your lawyer to have it removed from your loan agreement. The money you will save yourself on the long run (in a scenario of low interest rates) clearly offsets a lawyer’s fee. Always worth a shot.

If there is something in life we can safely rely on (besides death and taxes) is lenders’ relentless ‘creativity’ to come up with new exotic financial services to flog us. A sarcastic would write ‘greed’ in lieu of creativity. God forbid!

Those who cannot remember the past are condemned to repeat it” – George Santayana.

Philosopher, essayist, poet and novelist

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in conveyancing, taxation, inheritance and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

2.013 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Spanish Mortgage Loans: An Overview

Raymundo Larraín Nesbitt, February, 21. 2012

Mortgages are a useful legal tool that allows most would-be buyers the necessary financial means to acquire an overseas property. Spanish mortgage loans are similar to their UK counterparts with some nuances borrowers ought to be keenly aware of.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2012

 

 

 

Introduction

The purpose of this article is to continue the trend started in last month’s article (Spanish Mortgage Loans: Beware of Abusive Clauses) and shed some light on this often overlooked and obscure matter that may in time have such a large impact on our lives.

In this article I will focus specifically on real estate related mortgages.

Definition

A mortgage loan is an accessory contract, as the main contract is always the loan itself, which places a royal right against a real estate asset (whether movable or immovable) and is agreed upon in a public deed of registry. A notary public (notario) will bear witness and sign both the purchase deed and the mortgage deed along with borrower and lender. If a translator is necessary, they will also sign alongside. The deeds then have to be lodged before the Land Registry. The registrar (registrador) undertakes a second legal check before the mortgage is lodged. Both the notary and registrar are top-ranking civil servants who have attained a Law degree and have studied a very hard exam that can take several years to be admitted in their positions.

From the above, it can be surmised that a private loan that is not witnessed by a notary nor lodged at the land registry is not valid. In fact, any other mortgage loan that is drawn up afterwards and complies with the above legal formalities will always prevail against any former ones that lacked said formal requirements.

Essential Elements

In Spain, prior to signing a mortgage deed, lenders are required to clearly lay out the essential elements of the offered mortgage in a document known as a binding offer.

Capital: this is the amount you are taking on.
Duration: it is the period within which you must settle the loan i.e. 20 years
Rate of interest: is the price of the money you are borrowing. The higher the interest, the more you pay on the long run.

 

Types of Mortgages

 

There are many different types of mortgages. I will solely focus on this article on property- related mortgages and its main variations.

Fixed interest: As its name implies, the interest rate is locked throughout the duration of the loan. This has its advantages, such as giving forward visibility and not falling victim to fluctuating interest rates. It allows the borrower to plan ahead its monthly financial commitments eliminating any uncertainty as to what is owed to a lender each month. The main drawback is that the borrower will have to normally pay a premium throughout the life of the mortgage loan to offset the lack of risk and compensate for when interest rates are raised. This premium may be a couple of points above the current rate of interest.

Variable interest: The loan is normally referred or linked to an index which fluctuates over time. In Spain over 95 pc of mortgages belong to this type. Most of these mortgages are referred to the Euribor rate of interest which stands for Euro Interbank Offered Rate. It is the rate at which banks within the eurozone lend to each other (when they actually do trust to actually lend to one another…). The main advantage is that when interest rates are low, such as now, monthly repayments are also low saving borrowers considerable money on the long run. The disadvantage is that should rates rise, your repayments will follow suit thus increasing your monthly loan burden.

Spread (diferencial): In variable interest loans, points are added to the referred index. If you are non-resident in Spain this spread will be considerably higher to offset the risk of default as opposed to resident borrowers. The latter are considered “safer” as they already have assets within the country that can quickly be seized if necessary.

Interest-only (carencia): Some lenders may offer interest-only mortgages, particularly to young couples, as a teaser to entice them. In Spain these periods normally will last only a couple of years at most. It is a good idea for first-time buyers to get hold on the property ladder at a time when their source of income is precarious or low. Within the last years it has additionally been offered to struggling mortgage borrowers with the aim of easening up the financial burden of their repayments. In some cases to qualify you may need to demonstrate you are currently unemployed (sic).

Legal liability of a borrower in the event of default

This is a fairly important point that differs widely from its UK counterpart. If there is one milestone I want to highlight in this article, hands down it is this one.

In Spain, a borrower has a personal and unlimited liability which extends to all his current and future assets. The legal implications of this are very serious. Unlike in other countries, where in the event of the borrower defaulting the liability is limited to the value of the guaranteed real estate itself, in Spain the liability can have far-reaching consequences. A Spanish lender pursues the borrower himself, not the property, as the responsibility is personal. Additionally this implies that lenders pursue you abroad – and may seize – your home country’s assets for the shortfall incurred on defaulting on your Spanish mortgage loan. More on this in my article Spanish Creditors Pursuing Debts Abroad.

Because of how the legal system of repossessions is designed, biased towards lenders, a borrower can find himself owing a great deal of money to a bank after the underlying collateral, the real estate, has been repossessed. Unlike the UK, the deadline to repay this mounting debt does not expire, at least in practice. Compound default interest rates are added as well as the associated repossession expenses (i.e. lenders’ lawyer’s fees).

Formally a borrower’s responsibility on defaulting a mortgage loan is twenty years. However, in practice lenders may at any point in time interrupt this by means of a formal notification to the defaulter thus renewing the twenty-year deadline. Rinse and repeat and you may find yourself in the receiving end of a mounting debt spiral which follows you to your deathbed. Lenders outsource this debt-chasing to law firms who will make sure the debt remains always alive by contacting the borrower regularly, ensuring the twenty-year limit is always in order. The logic behind this, is that the defaulting borrower may come into wealth over time, i.e. inheritance, and may now be in a situation to settle his debt. In my humble opinion this system should be amended and borrowers should be given a chance to rebuild their financial lifes without turning them into financial pariahs.

Additionally, lenders will inform credit-rating companies, such as Experian, of your credit worthiness which may have a large impact in your home country. You can read further on the practical consequences in my article Bad Debtor’s List (‘Fichero de Morosos') The conclusion one can draw is that defaulting on a Spanish mortgage loan is a very serious matter that ought to be pondered very carefully and in my opinion ought to be avoided at all costs.

Fortunately in Spain debts are cleared on a debtor passing away (and naturally no one is sent to prison in Spain for bad debts). The exception to this rule is that debts can be inherited on accepting a troubled Spanish estate. At times it may be wiser to waive off the right to accept an inheritance if it implies the passive outstripping the rights and assets.

Dación en Pago

For all those who’ve slipped into mortgage arrears in Spain or are likely to and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dacion en pago. For a property owner, a dacion en pago means basically handing back the keys to their lender (relinquishing property) and in exchange being discharged of the remaining mortgage debt. You can read an in-depth article on how it works in practice on reading Dación en Pago Explained or How to hand Back the Keys.

Unlike other countries, the dación en pago is not a legal figure that formally exists within our legal system. The procedure is loosely based on art 1.175 of the Spanish Civil Code and article 140 of Spain’s Mortgage Act . For the lender to accept it two conditions are required:

1. The property must not be in negative equity (no-negative equity rule).
2. The lender must not have started a repossession procedure against the borrower.

Even if you have slipped into arrears by some months, lenders will still accept a dacion providing you comply with the above two requirements.

When I first wrote an article on the matter, on the 21st November 2008, lenders were more open to the idea of a dacion. However, as the financial crisis has intensified and persisted over time, lenders have grown increasingly reluctant to the idea of accepting a dacion en pago. Only borrowers whose properties are significantly in positive equity territory are allowed to follow this procedure. Over the years they have raised the yardstick to the point it has become unattainable for most defaulting borrowers. There is now a social movement in Spain, which is gathering pace, to have the dacion en pago included as a figure in our legal system.

What many fail to see, is that a dacion implies huge expenses for a lender on accepting it not to mention the running expenses of keeping a property (i.e. Community fees and property taxes). To this you must add the huge provisions they need to set aside to cover the risk. The last thing Spanish banks need now is yet another repossessed property or dacion which act as financial millstones around their necks at a time where they are struggling to secure finance abroad. Hence their growing reluctance to accept a dacion, even if that means resorting to a repossession procedure.

For more advice on how to cope with mortgage repayments, please read my article Advice to Struggling Mortgage Borrowers in Spain.

Bank repossessions in Spain

This subject and its associated legal procedure is covered in detail by my article Bank Repossessions in Spain.

Lifetime loans or reverse mortgages in Spain

This subject is covered in my article Lifetime loans in Spain Explained, published in SPI on the 21st February 2011.

In Conclusion

House ownership in Spain accounts for over 80pc of property. Owning one’s own property is deeply embedded in the Spanish psyche. Most buyers rely on a mortgage to finance their dream property. Make sure you fully understand the mortgage terms prior to signing a mortgage deed. Do not be afraid to ask any queries on the matter no matter how stupid they may seem to you.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.


2.012 © Raymundo Larraín Nesbitt. All rights reserved.

 

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Spanish Mortgage Loans: Beware of Abusive Clauses

Raymundo Larraín Nesbitt, January, 8. 2012

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.

 

Spanish Mortgages: 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.

What happens if I’ve already signed a loan with a collar clause?

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.

In Conclusion

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.

 

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in litigation, conveyancing inheritance and taxation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.


2.009 and 2.012 © Raymundo Larraín Nesbitt. All rights reserved.

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10 Useful Tips in Uncertain Financial Times

Raymundo Larraín Nesbitt, July, 8. 2011

The following article, unlike previous ones, is not subject-focused. Its purpose is to include in one text a loosely assorted recollection of tax and financial-related frequently asked questions by putting them all together in one text for simplicities’ sake. This will simplify people’s life on not having to skim through a myriad of legal texts in search for the right answer to their queries. In addition, I’ve also included a batch of associated legal novelties which make for significant amendments.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of July 2011

 

 

 

 

Photo credit: © Istockphoto

 

FAQ Related to the Ongoing Financial Crisis

 

1. In the event of bankruptcy, up to what amount do Spanish banks guarantee deposits? In the wake of Lehman’s financial meltdown, which threatened contagion to the entire financial system, the Bank of Spain raised in 2008 the protected amount to €100,000 per account holder. The ensuing widespread fear brought the spectacle of fellow European countries frantically raising national deposit guarantees in a clumsy competition to attract each other’s savings’ deposits. This unleashed an undeclared war of liquidity as was the case of Britain and Ireland, with British citizens flocking frantically to Irish banks as its Government had raised unexpectedly, amid growing public concern on the state of its banks, the safeguarded deposit limit to well above that of its UK counterpart.

Subsequently the EU, to thwart this budding deposit dickering, put an end to it by adopting the €100,000 cap as standard for all EU banks. This ensured that 95% of all deposits were now safeguarded under the protection of national deposit-guarantee schemes.

Any money you have exceeding said amount, will be forfeited in the event of you lender’s insolvency. Which is why, following the saying, you should not put all your eggs in the same basket. I would advise, depending on your wealth, to spread your risk opening accounts in different banks with a capped amount of 100k in each account. Just to be on the safe side. I’d rather err in the safe side than being overconfident in the wrong side, wouldn’t you agree? Better safe than sorry.

In Spain, there are three Public institutions tasked with guaranteeing saver’s deposits. The FGDEB oversees banks, the FGCDA savings banks and finally the FGDCC guarantees deposits at Credit Unions.

Spain’s weakest financial link is deemed to be its regional Savings Banks (Cajas de Ahorros, in Spanish) which have invested heavily in the real estate sector. For this reason, the FGCDA has been allocated with the highest amount of – taxpayer’s – funds in view of unexpected losses, or maybe not. The FGDEB comes close in second place with slightly over 3 billion euros (as of 2009) in provisioned funds.

Notwithstanding the above, the Bank of Spain, on the wake of EU and IMF recommendations, has fostered Spanish Savings Banks into a frenzy of merging and acquisitions with the idea of propping up their beleaguered coffers. The theory behind this is to create huge supra regional financial institutions with a healthy balance sheet that are deemed too big to fail by the market. Sounds familiar? A prominent example of this ongoing process would be Bankia. I’ll make a huge effort of self-restraint and bite my tongue – hard – so as not to make some witty criticism on the flawed logic behind this reasoning such as the ones we are regularly treated by the FT’s Alphaville blog and which make for some enjoyable reading for their ever ingenious sarcasm.

2. Should my Spanish lender default, how long does it take for them to pay me the guaranteed amount? This is an excellent question as in truth it doesn’t matter one iota how much is guaranteed if you simply do not know when you’ll be paid the safeguarded deposits. As they say, the Devil is in the detail.

Last month, concretely on Friday the 17th of June, EU member-countries unified the deadline and set it at only 20 days for reimbursement. This measure is yet to be ratified by all EU members. Brussels wanted to reduce it to only seven days but some countries opposed. In the US by comparison, the deadline is only 48 hours.

3. What is the statutory time limit for a mortgage-backed loan? The technical reply is 20 years. However, creditors at any point in time can interrupt this by requesting the debt be settled whether out-of-court or through a certified law court notification. In which case, the time limit resets itself to zero and the twenty year limit starts anew.

In practice the reply is never, because Spanish creditors always make sure to contact debtors at periodical intervals, through law firms, so the claim remains always live and outstanding on their books. Unlike the UK, in Spain a defaulted mortgage-backed loan can haunt you for the remainder of your life and the interests will only roll over adding to the overall debt.

4. What amount does collateral (normally real estate), securing a defaulted mortgage loan, fetch in a Public Auction? The rules have changed recently. It used to be that in a second bid, lenders normally withheld the asset for 50% of its appraisal value for the specific purpose of a mortgage-backed loan. This has now been mercifully addressed by the Spanish Government after widespread public outcry and has been raised to 60% thus reducing the overall debt burden of the defaulted borrower. It’s not much, truth be said, but the changes are indeed in my opinion pointing in the correct direction. Hundreds of thousands of borrowers in Spain have defaulted since 2007 and are caught in an ever increasing financial snowball with not a chance of hope to rebuild their lives as the debt mounts exponentially over time eventually spiraling out of control if unchecked.

5. What is the required deposit to bid in a Public Auction? It used to be 30% of the appraisal value specific for auction purposes. This deposit is required, by law, to qualify as bidder and is lodged into a law court’s bank account prior to the auction taking place. The valuation can be found in the Mortgage deed. To delve further, please read my article Bank Repossessions in Spain.

The Government has now amended this figure and has brought it down to 20%. So anyone wanting to bid in a Public Auction “only” needs a down payment amounting to twenty per cent of the valuation specific for auction purposes. Should one be outbid, the deposit is refunded, in full, to the bidder.

The reasoning behind this amendment is because law courts are clogged by Public auctions as a direct consequence of unpaid mortgages coupled in by an endemic shortage of liquidity. As credit in Spain is almost shut off by lenders, few people are able to afford to bid as it is hard to raise a 30 or 20% cash deposit with such short notice.

The Government realizing the existing problem, has redrafted the procedural rules so they are more lenient in the hope of allowing more bidders to access auctions and thus offload lender’s cumbersome real estate portfolios. This measure will, hopefully, allow lenders to ease the glut of property from their books which only detract from their liquidity, lowering their credit-rating, as they have associated ongoing maintenance costs i.e. Community of Owner’s fees, property taxes etc.

6. Up to what amount of my wage is protected from being embargoed by creditors? Art 607 of Spain’s Civil Procedural Law rules this in detail. As a general rule-of-thumb, and not to get lost in the minefield of exceptions, the limit used to be Spain’s Minimum Legal Wage (SMI, in Spanish) with a 10% addition in the case of those borrowers who defaulted on their mortgage loans. The MLW was currently set for 2011 at €641. The MLW is adjusted annually, in line with inflation, on approving and publishing Spain’s Budget Law.

The Government attending to the plight of hundreds of thousands of Spanish families who’ve defaulted on their mortgage loans has raised the legal threshold by 150%. This translates to €960 as the new general threshold which cannot be seized by lenders on defaulting a mortgage-backed loan in Spain. However, here comes the small print, if the borrower has family members it takes care of, such as minors or other members of legal age which are out-of-work an extra 30%, taking the MLG as basis for all calculations, is added per member.

So as an example, a married father with a toddler and a wife, both jobless, would have a combined minimum threshold, which cannot be seized by lenders, of approximately €1,350. This almost doubles the afore cap which allows debt-laden families to at least make ends meet at the end of every month without having to resort to other family members or even charity in the worst cases. In Spain, traditionally, extended Family has always acted as safety nets when Government, Church or even Society at large, fail to help those in difficult times.

7. Is it true that Spain’s Tax Office is clamping down as of late in undeclared lets? I’m afraid so. Due to the much publicized downfall in property-related tax revenues the Spanish Tax Office, nudged by the Government which has recently replaced its General director by a more aggressively proactive one, has decided to offset its abundant losses by becoming creative and less lenient in its practices. And this of course means targeting undeclared lets which were traditionally rife in Spain. The Spanish Tax Office has a statutory time limit of four years to pursue unpaid taxes. To help in its crusade, it has struck an agreement with utility companies to cross-check tax declarations with household utility consumption. Where it detects that a second home has been fiscally declared as standing empty but the utility consumption clearly indicates otherwise, it will request from the Landlord a full explanation which, if proven unsatisfactory, will lead to payment of due taxes, interests and a possible fine by the tax offender.

8. Is it true that if I buy a below market value (BMV) property I can be fined by the Spanish Tax Office at a later date? Yes, it’s true. The Spanish Tax Office has in its books a valuation for every real estate asset in Spain which is related to its Cadastral value. The Cadastral value is a valuation that is taken as benchmark to calculate a number of property-related taxes in Spain, levied both by local and regional Authorities. So basically, if you snatch up a nice bargain under the sun, maybe 6 months down the line you will receive a nasty letter from the Tax Office that sets your heart throbbing looking to extricate a purported tax shortfall that you ‘under-declared’ at the Notary, whether knowingly or not; regardless. This can be either avoided altogether or else even challenged successfully, no strings attached. For more details, please read my dedicated article: La Complementaria or ‘Bargain Hunter Tax’.

To avoid it, All your conveyance lawyer needs do is request a binding valuation from the Tax Office on the value of a property prior to its purchase (exchange at the Notary Public). This valuation is normally only binding for the following 3 months after which it becomes void and a new one must be commanded. You know that if you buy below said valuation you will be taxed for the shortfall in taxes.

Additionally the Tax Office valuation for tax purposes can be in fact challenged administratively. These legal procedures are in fact very fast, as in months, not years, unlike Civil ones, with which we are all too familiar. The reason being is that a fair number can be challenged on technical grounds which are not reviewed by the court, they are simply taken as a fact and the case against you is thrown out of court and filed away with no further taxes to be paid. These cases are for the most part very affordable, in comparison to say Civil ones, as they do not imply a full blown out legal procedure. So you can be talking of being charged as little as €1,500 in legal fees (plus 18% VAT) by your lawyer plus the expenses of a new valuation carried out by a surveyor of your own choice (normally a chartered technical architect) to challenge that of the administration which tend to be flawed at best, if not downright skewed at worst, I dare say.

9. Is it true you can file for personal bankruptcy in Spain? Yes, it’s true. However, unlike the UK, where personal bankruptcy is not only an option but it’s even recommendable to cope with a fleeting financial downfall of which you can recover in some years’ time and get back on your own two feet. In Spain it is devious and not recommendable at all unless you are wealthy, which seems to defeat its own purpose if you come to think of it really. Personally, I don’t regard it as a viable option in most cases i.e. the typical mortgage loan default.

In Spain, out of hundreds of thousands of families which have defaulted on their mortgage loans over the last 4 years very few, in the hundreds, have applied for this legal figure. The reason being is that the process is both expensive for the average citizen, hence my comment that it’s only an option for affluent people looking to re-negotiate their financial commitments (meaning they actually have a leverage to negotiate with financial institutions due to their large estate), and time-consuming to the point it becomes a tedious chore. You will also become a financial pariah for the remainder of your lifetime.

The law court appoints an administrator to oversee your estate, who is paid a wage out of your own assets. You may find yourself (real case) queuing up and filing administrative papers for as much as ten hours just to withdraw a ten euro note from your own bank account, needing the compulsory administrator’s prior permission. Frankly, not worth the time.

Bottom line, less well-off borrowers need not apply. This really ought to be addressed by the Government to allow it to be a real option for the average borrower as in other European countries. Currently, it is not and should be avoided altogether.

10. Is it true that Spanish lenders can pursue you abroad for negative equity? Yes, it’s true.

In Conclusion

It is advisable you pay your debts in timely manner, especially in Spain, and more so if you own assets, whether in Spain or abroad (within the European Union they are easier to seize following EU Regulation, read above article). As always, seek legal advise from a lawyer before taking any – rash – decision. At least you will have a clear picture of what your legal options are. At times, you will be pleasantly surprised to find you have more options than what you initially bargained for. You won’t know, if you don’t ask.

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.


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Advice to Struggling Mortgage Borrowers in Spain

Raymundo Larraín Nesbitt, March, 8. 2011

Ex-pat landlords are still struggling to remain afloat in 2011. This article provides them with some useful tips.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
8th of March 2011

 

 

Introduction

From a global perspective, political instability in the Middle East has sparked tensions fueling oil prices to new record highs. The Japanese tragedy has set the stage for a further rise in commodity prices needed to re-build the country which were already at all-time highs due to China’s ongoing real estate bubble. This in turn has brought a surge in inflation (rise in the general level of prices of goods and services). As a result the European Central Bank is juggling on the one hand unchecked inflation and on the other the budding recovery of an ailing European economy straggled by peripheral economies which in turn are debt-laden. The ECB, de facto heir of the Deutsche Bundesbank, has a mandate to keep inflation at bay. As a result of this commitment it announced it will hike the official interest rate as of April with more hikes to follow along the year.

The problem is that on doing so you run the risk of derailing the budding European recovery spearheaded by Germany tipping the economy into a full-fledged double-dip scenario. So it’s really a matter of balancing priorities in Europe. Peripheral economies vs. export-oriented countries. The former, saddled with debt, will be the ones bearing the brunt of a rise of interest rate while the latter will reap the benefits. Mind you, a sharp rise in interest rates would also hurt the latter. The choice, seemingly, has already been made by the ECB.

The Euribor rate (to which most Spanish mortgages are referred to) has already risen in anticipation of the foreseen hike. This will translate into higher mortgage repayments. With hundred of thousands of Spanish mortgages already underwater this could not come at a worst time.

From a national perspective, the Spanish Government is bent on closing the ever-widening deficit having decided to clampdown on black money in an effort to prop up its dwindling coffers. As a result the AEAT (Spain’s equivalent to HMRC) will be taking a number of new measures such as cross-referencing with utility companies household consumption as from March to detect undeclared rentals which are rife in Spain. The afore measure will have foreseeable side effects.

Landlords with undeclared lets will now be faced with the grim prospect of either disclosing the let (maybe even raising it so as to offset rental taxes) or else continue at large running the risk of getting caught and fined by the local tax authorities. The afore is compounded and aggravated by the fact that ex-pat landlords normally use the rental income to offset their Spanish mortgage repayments. At a time when rentals vastly outstrip demand in Spain, and good-paying tenants are increasingly hard to come by, this couldn’t come at a worst time. It is doubtful a tenant will cave in to a landlord’s demand to raise the let to offset the associated taxes. The tenant will probably opt to move elsewhere as nowadays they will be spoilt for choice.

All the above will bring about additional headaches to already struggling ex-pat landlords. British will be particularly worst off due to the strengthening of the Euro against Sterling over the last couple of years.

With the above in mind, I’ve written this article in anticipation of the financial problems that are to come for many borrowers in Spain.

 

Tips to Struggling Mortgage Borrowers

 

1. Swap to interest-only (“carencia”). This can be arranged whilst the property is put up for sale or just to weather off the storm meanwhile. This option has become increasingly difficult post credit-crunch as Spanish banks seldom grant interest-only and when they do, it’s really just as a teaser for two years at most.

2. Extending mortgage repayments an additional number of years. The drawback is that on doing so the amount of interests you pay on the long run are increased dramatically. So it’s only an option for those left with no other really. The Government is now allowing this change free of charge to struggling mortgage borrowers providing they are resident and the property is their permanent dwelling. Borrowers will not pay for Notary or Land Registry fees on following it.

3. Dación en pago. This is basically handing over the keys back to the lender and signing a deed at the Notary whereby the lender commits itself not to chase you for the outstanding debt and considers it discharged for good. Two things are required, the property must not have slipped into negative equity and ideally there should be, as rule-of-thumb, at least 20% equity so as to offset the lenders’ expenses on taking over the property. It doesn’t matter if you are already in arrears, what does matter is that the repossession procedure must not have been started by the lender. Should the property be in negative equity (you owe more than what the property is worth) a lender will be very reluctant to agree to a “dación en pago de deuda” because the collateral will have no equity left. Please read my article Dación en Pago or Handing Back the Keys for more details.

4. Selling the property as a distressed asset. If you have already run through the numbers and you are convinced that you will no longer be able to service your mortgage, rather than defaulting and being repossessed, you should very seriously consider selling the property as a distressed asset. The catch again is that the property should not be in negative equity. The more it is the least likelihood there will be anyone interested in it as they in turn are regarding the purchase as an investment and the numbers need to stack up to make it worthwhile for them.

5. Applying for debt consolidation. There are many financial companies offering this service. Basically what they do is group together all your existing debts with different lenders (ranging from credit card debt to personal loans) with one lender who then extends the loan repayments. The consequence this has is that your monthly repayments are cut down significantly making them more affordable. However the drawback once again is that on extending the financial commitments you will be paying more interest over time.

6. Swapping the mortgage to a new lender. Many lenders are now offering to take on existing mortgages going as far as paying all the transfer expenses. Lenders will normally require the property was bought prior to 2003. This is because properties purchased before this date are deemed as “safe” (not in risk of being in negative equity). In addition, for those who hold collar clauses (“cláusula suelo), swapping over to another lender offers the opportunity to get rid of these bothersome clauses and take advantage of the low interest rates. Moreover, new rulings have declared collar clauses as abusive (something which incidentally I had already pointed out in my article on 10 Common Abusive Clauses in Spanish Mortgage Loans). These rulings are forcing lenders to scrape them off their existing mortgage contracts within the next two months of the ruling as well as not to include them in new contracts.

7. Filing for personal bankruptcy in Spain. This procedure is expensive albeit it allows those who can afford it to buy considerable time (years) with which to re-negotiate your financial commitments and even reduce the amount owed (up to 30%). A judicially-appointed administrator will be tasked to oversee and manage your day-to-day financial affairs in the interim. Meaning you lose control over all your assets needing to request permission. I would only recommend this option in exceptional cases as it will turn you into a lifetime financial pariah. This is not an option for most people.

In Conclusion

My advice is to draw the red line on a repossession procedure. You should try to avoid this scenario at all costs. As the debt goes personally against the borrower in Spain, you may live a nightmare with debt-collecting agencies, banks or lawyers knocking at your door for years to come. As the compound default interest is fairly high this will be rolled up to what you already owe creating a mounting debt spiral.

A lawyer can help a struggling borrower to achieve the above tips successfully averting a debt spiral drawing a line to protect your family assets.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

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Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.


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Lifetime Loans in Spain Explained

Raymundo Larraín Nesbitt, February, 21. 2011

Lifetime Loans, despite being relatively well-known and accepted in Anglosaxon countries for decades, are only just getting started in Spain. Back in 2006, acting on behalf of a foreign lender, I was one of the first lawyers to formally introduce them.

By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2011

 

 

 

 

 

Photo credit: Courtesy Daily Mail. © Alamy.

Introduction

It wasn’t until the fall of the following year, with the amendment brought about by Law 41/2007 to the all important Mortgage Act of 1981, in which for the first time a Spanish Law ruled on this “new” financial service. Even so, it brushed on it ever so lightly, almost in a shy fleeting manner, in its Additional Dispositions. Reserving the brunt of the regulation for future legislation. Here’s hoping.

What is a Lifetime Loan?

It works basically as a reverse mortgage (‘Hipoteca Inversa’ in Spanish). It is a special type of home equity loan for senior citizens. It allows owners to convert some of the equity in their homes to cash by placing a charge against their property (which acts as collateral). The loan does not have to be repaid during the homeowner’s lifetime.

The borrower retains full ownership of the home and can actually continue living in it until they or their surviving partner passes away. Once this takes place, the loan (plus accrued interests) must be settled by either selling the property or else by the appointed heirs who will repay it in full. The loan can be taken either as lump sum or periodically at the borrower’s choice. The older you are the larger the amount of money you can qualify for as it follows a sliding scale.

At no time will the borrower ever owe more than what the collateral is worth even if the resulting debt is higher. Meaning that at the time of passing away it suffices to either hand over the property to the lender or else to pay to settle the debt for good. The afore has huge legal implications as it implies that, unlike a normal Spanish mortgage loan, with a Lifetime Loan you cannot be pursued for negative equity. In other words, the valuation of the property for the purpose of requesting this loan facility is the threshold you can expect to owe a lender on signing on the dotted line.

Who qualifies for a Lifetime Loan?

In Spain, following Law 41/2007, those who qualify must be aged 65 and older or else have a medically certified serious disability.

A Lifetime Loan may not be suitable for everyone.

 

Advantages

 

Financial turmoil on an unprecedented global scale entails continued Government budget cuts which affect Public Pension expenditure. Relying on a State pension is a one way ticket to a roller coaster ride with your own hard-earned money! Governments, for the foreseeable future, will continue to curtail public expenditure (i.e. Pensions) as well as adding more years on the retirement age. For example, Spain has just approved delaying by 2 years the age of retirement, bringing it to 67 besides reducing the amounts themselves. Furthermore, they’ve already hinted that in the near future they will set back retirement by a further 2 years; tallying a total of 69 years to retire. It is in such times that the benefits of a Lifetime Loan (LTL, for short) become self-evident:

  • You do not have to repay the loan during your lifetime as the interests are rolled up and added to the loan amount. Unlike a standard mortgage there are no monthly repayments (so you cannot fall into arrears). If you are a couple the loan is only due after the surviving partner dies. It is repaid or settled only after you’ve passed away by your heirs normally discounting it from the sales proceeds of the property.
  • You can choose to withdraw the facility either periodically or else in lump sum (cash). Or maybe even choose a combination of both.
  • The drawdown has no restrictions. Meaning you can use the drawdown facility for whatever pleases you. i.e. pamper yourself with a luxury holiday to New Zealand.
  • Neither you nor your heirs will ever be pursued for negative equity abroad (as would be the case of a standard Spanish mortgage) as the responsibility is not personal but limited to the asset itself. The maximum amount owed (accrued compound interests and expenses included) will never exceed the valuation of the property (collateral) by Law.
  • A LTL adds financial security supplementing nicely increasingly low State pensions. Not everyone can afford to subscribe a Private Pension scheme. So basically you will have more money to spend at the beginning of each month in your bank account.
  • Strengthening of the euro against sterling translates into diminished acquisition power by Expats living in Spain. The case of UK senior citizens has been particularly dramatic over the last years as they’ve lost over 30% in purchasing power on living in Spain which has forced many to change or even completely redefine their lifestyles. A LTL is released in euros against your existing Spanish property thus helping to offset any currency exchange fluctuations which may harm your pocket.
  • A LTL allows you to retain full ownership without taking away your home whilst you live which is a significant boon. So basically you now have more money available to spend in anything you like whilst being able to live in the property for the remainder of your life. You will never lose the property, by Law, as long as you live which is fairly reassuring.
  • A LTL is most helpful for those who are asset rich but cash poor. It helps you to unlock the hidden equity tied into your property. Many Expats who bought prior to the last boom have huge amounts of equity locked away in their properties.
  • A LTL is non-status, meaning there is no income requirement.
  • It goes without saying that a LTL helps to mitigate stress as you no longer have to worry for the remainder of your life to make ends meet.
  • The older you are the more money the Lender is willing to lend you.
  • LTL are ideal if you have no heirs or else they are already sufficiently provided for with other assets.
  • You can still sell the property but you will have to repay the loan in full.

 

Disadvantages

 

The main problem will be your heirs. Those who stand to inherit will be most reluctant in you hiring a LTL and will attempt to hack any budding ideas you may have on the matter. And the reason is simple. When you pass away, the outstanding debt will be deducted from the sales proceeds of the property. A heir therefore stands to inherit less (or even nothing at all) which helps explain why LTL are so unpopular with potential Spanish beneficiaries. In extreme cases the outstanding debt may eat away all the equity. In such cases a Lender will normally retain the collateral (your home) in return of settling the loan in full. A heir would much rather hand over a property (which no longer has any equity left) than paying the debt in full (which amounts maximum to the property itself).

  • The main disadvantage is the interest rate charged. If its high enough it may imply your heirs foregoing inheriting the property. So basically it’s as if you had mis-sold your home to a lender, on passing away, for a fraction of its true market value. This is particularly true the longer you live, as more compound interest will be accrued over time eroding the equity until none is left.
  • On applying for a LTL you will always be given less money for your home than if you applied for a standard mortgage.
  • The property must be free of charges, encumbrances and debts. If there’s already an outstanding mortgage on it, the application will most likely be turned down. A typical problem I found were mortgages which had been cancelled at the Notary but not at the Land Registrar so they showed up on requesting the properties legal status.
  • LTL have a positive correlation with the property cycle (this is bad). Meaning that when real estate outperforms Lenders will fall over themselves to offer you one. But when real estate slumbers Lenders are prone to pull away LTL or else make them less attractive by restricting their access as there is a shortage of liquidity. Oddly enough the latter (recessions) will be the time when potential clients will need LTL the most! There’s a great phrase of American author Mark Twain which coins it up: “A banker is a fellow who lends you his umbrella when the sun is shining and wants it back the minute it begins to rain”.
  • You need to be 65 or older to qualify (this may be revised upwards with the amendments to Spain’s retirement age).
  • The younger you are (closer to 65 y.o.) the less money you will receive.
  • You will have to pay the valuation of the property out of your own pocket (several hundred euros) before the Lender actually decides on whether they grant you -or not- a LTL. In fact, the valuation is pivotal to their decision-making.
  • The maximum amount of the facility will equate to the properties value and how old you are. This amount is normally only a fraction of the properties true value.
  • Once you have withdrawn the facility you can no longer request additional funds or remortgage the property if needed be (i.e. unexpected Health disbursements).
  • A LTL is taken on your permanent residence. So you actually need to live in the property all year round. The logic behind this is that the Lender wants the collateral to be in tip-top shape. A property with no one living in it will quickly fall in a state of disrepair and be subject to break-ins or vandalism which diminishes the collateral’s value.
  • For the reason above letting will normally be forbidden.
  • If you require to move away for long-term care the repayment may be due in full.
  • Taking on a LTL requires a charge is placed against the property which has associated expenses and taxes. Request beforehand a detailed breakdown of what the loan entails prior to making up your mind so as to avert unpleasant surprises in the form of unexpected disbursements.


In Conclusion

Retirement nowadays is akin to playing a soccer match in which the Government keeps moving the goal posts mid-play! Some people would rather not take chances with their retirement playing it safe.

A Lifetime Loan may be a good option that can help you and your partner achieve that extra income to help you get by more comfortably without changing your lifestyle (or even improving it!). I would however strongly recommend you to obtain independent legal advice prior to hiring a LTL so as to avoid rash decisions.

Larraín Nesbitt Lawyers, small on fees, big on service.

Larraín Nesbitt Lawyers is a law firm specialized in inheritance, conveyancing, taxation and litigation. We will be very pleased to discuss your matter with you. You can contact us by e-mail at info@larrainnesbitt.com, by telephone on (+34) 952 19 22 88 or by completing our contact form.

Legal services Larraín Nesbitt Lawyers can offer you

 

Related articles

 

Please note the information provided in this article is of general interest only and is not to be construed or intended as substitute for professional legal advice. This article may be posted freely in websites or other social media so long as the author is duly credited. Plagiarizing, whether in whole or in part, this article without crediting the author may result in criminal prosecution. VOV.

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