New Mortgage Law in Spain

On June 16, 2019, the new ‘Real Estate Credit Law’ came into effect, better known as the ‘New Mortgage Law. This regulation, which comes after a delay of more than 3 years, is there to protect consumers in 3 fundamental aspects: avoiding evictions, lowering mortgage repayment and forcing banks to pay formalisation expenses.

The new mortgage law forces financial institutions (banks) to bear the expenses derived from the formalisation of mortgages, except for the property valuation cost. Therefore, the entities must pay the expenses of the Notary, any agencies, the Land Registry and, of course, the Tax on Documented Legal Acts (Impuesto sobre Actos Jurídicos Documentados). However, will this translate into real savings for future mortgage clients? As already reported, banks will most likely transfer the extra cost to the clients by increasing interest rates. The valuation of real estate, being a service provided by the user with the objective of guaranteeing the mortgage loan, is the responsibility of the applicant, according to the new regulation. The client will also have to pay for ‘offical’ copies of the deeds that are required or requested. In addition, it is mentioned that the opening commission (comisión de apertura) is legal. The banks incur a series of expenses in the processing of legal documents, so the authorities believe that it is legitimate to impose this expense (although many banks have voluntarily eliminated it). This rule does NOT have a retroactive effect, so it cannot be used as an argument in claims for the formalisation of previous mortgages.

Until now, the bank could execute the early expiry of the mortgage if the client incurred three unpaid instalments. The new mortgage regulation will protect the client to a greater extent by raising the default thresholds in the following way:

 -      During the first half of the contract: there must be a non-payment of fees that reach 3% of the main loan or 12 monthly payments. Thereafter, the mortgage can be executed.

 -      From the second half of the contract: there must be a non-payment of fees that reach 7% of the main loan or 15 monthly payments. Here the clients are granted a larger margin, since the client has been paying the mortgage for a longer period of time, meaning  there has been more of an effort to pay the mortgage.

The law does NOT include individual debt collection agreements (‘dación en pago’,  for those with payment problems). In addition, this measure will not enter retroactively in cases where there is already an active eviction procedure, but it will have a retroactive effect in the rest of the cases.

The current law contemplates a commission for early repayment of 0.5% for the first 5 years and 0.25% from the sixth year. The new law wants to lower the costs of early repayment of the mortgage to equate Spanish legislation with the European directive:

 -      Amortisation of variable rate mortgages

   o  First three years of the mortgage: commission of 0.25% on the amortised amount.

   o  From the third year: commission of 0.15% on the amortised amount.

 -      Amortisation of mortgages at a fixed rate: As for mortgages at a fixed rate, the maximum commissions applied will be 2% for the first 10 years and 1.5% thereafter. Banks are free to apply commissions below those figures if they so wish.

This measure has been approved retroactively for new mortgage repayments. What does this mean? That all those who carry out an anticipated payment in their mortgage from the 16th of June, will be able to take advantage of these new conditions. Those who already made an early payment in the past (with the previous law in force) will NOT be able to claim or recover the money.

The maximum commission applicable for the change from variable to fixed mortgage will be 0.15% during the first 3 years. Then it will be free. The bank reserves the right to accept or not change the mortgage at a variable rate to a fixed rate mortgage.
The maximum delay interest established in the contract will be three times the official price of the money.

The Notary acquires a key role in the signature of mortgages. To begin with, the client will choose the Notary and not the bank, thus avoiding being coerced. On the other hand, the Notary no longer has a testimonial role to actively watch over the fact that the client has understood  all of the mortgage clauses and their meanings. If any change in the binding offer occurs, the review process will start again: there will be up to 10 days for the client to review the binding offer, make an appointment with the Notary to review it, and then make an appointment with the Notary + agent of the bank for the signature.

In conclusion, Any mortgages already signed are subject to the foregoing mortgage law, except if a mortgage subrogation or renewal applies on that mortgage. In that case, there is a modification in the contract and therefore they would qualify for the new mortgage law.

The only measures that do affect mortgages signed before June 16, 2019 are those related to evictions, in the reduction of commissions in the move to a fixed mortgage and in the partial / total repayments that occur as of today.

An important note is that the new mortgage law was approved by the need to adapt to European regulations 2014/17 / EU. However, key measures that are being claimed by Brussels have not been included in the body of the new law, which can result in a fine of 106,000 euros per day for Spain for breaching (or in this case, only partially complying) with European regulations. In fact, this reform should have been completed before April 2016, but, as you can see, hasn’t come into effect until recently.

Hopefully we will see more updates on the new law that include all the measures not included in this law, but necessary to comply with EU regulations.