A SWAP is an insurance policy which purpose is to offset major fluctuations in, for example, a benchmark interest rate to which a mortgage is referred to. In Spain most mortgage loans are referred to the EURIBOR rate (Euro Interbank Offered Rate). The EURIBOR is the average interest rate at which a panel of 57 European banks lend to one another. The idea with a SWAP clause is that you pay a small fee on a regular basis to your lender as a normal insurance to offset against major interests rate fluctuations and if the Euribor rate should for example fluctuate wildly, as it did back in October 2008, hitting an extreme 5% your repayment interest rate would be capped at say 3%. Basically it’s as if you agree into signing your own collar clause where you are assured to pay a capped interest rate to your lender. This in theory.
In practice a SWAP is a complex financial instrument that has been in use by large corporations since the fifties to offset against currency and interest rate fluctuations. The problem came when it was recently mis-sold en masse during the last boom years to unsuspecting borrowers as a “safe” product without disclosing in full the pitfalls it may entail should the interest rate fluctuate steeply. Or even worse, in many cases it was bundled together with the mortgage loan itself as “free of charge”. Who would in their sound mind turn down a freebie which is tagged by a bank as “safe”?
When you hire a SWAP (AKA as “clip hipotecario” in Spanish), unbeknownst to many you are tacitly making an educated guess on where the interest rate will be heading next; so it’s basically taking a gamble with your hard-earned money! This product was marketed and sold as something “safe” and at times even as “free”, but its drawbacks were not disclosed to borrowers which in most cases lacked the necessary financial savvy to ascertain clearly what they were being (mis)sold or even been given away as a “free” insurance. What was seldom explained to potential customers was that if the benchmark interest rate fell below a certain percentage it’s the borrower who had to pay to his lender an amount to offset the shortfall in the interest rate! And it’s no small amount either, tallying hundreds of euros a month in the worst cases which are to be paid in addition to the mortgage repayments of already struggling borrowers. So it has been an unexpected double or even a triple whammy for those whose source of income is in sterling pounds bearing in mind the poor exchange rate to the Euro over the last two years.
If you want to cancel a SWAP clause through a Notary public you will have to pay for the “privilege” on average €15,000 for individual borrowers and €40,000 for companies. This is an added grievance to those borrowers which had a SWAP tagged onto their mortgage loan as a “freebie” unbeknown to them.
This “insurance” was largely mis-sold or even given away “freely” over the last years, at the peak of an all-time high Euribor interest rate, when lenders knew full well this rate was bound to reverse its trend and start heading down hitting historical lows. So basically they were (mis)selling a product which was going to bring huge losses to its clients within months of having hired it! As American novelist Mark Twain used to note with an acid sense of humour: “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”
And now the positive news: There have been a string of likeminded rulings both from lower and High courts in 2009 and 2010 establishing that SWAP clauses offered en masse to unsuspecting mortgage borrowers are really abusive clauses and determine they should be regarded as null and void as they lack consent. This avoids borrowers having to pay €15,000 or more to have them cancelled at a Notary. Moreover, Judges have awarded a full refund to borrowers who litigated on the commissions unduly paid to their lenders over the last years because of this insurance policy which was not properly explained to them. Even Spain’s Ombudsman has condemned them as abusive.
What to do?
If you think you may have been a victim of a SWAP clause in your Spanish mortgage, call or e-mail us to see if we can act on your behalf. Strength will be in large numbers.
Spanish Mortgage Loans Beware of Abusive Clauses – 8th January 2012
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