10 Common Abusive Clauses in Spanish Mortgage Loans
Raymundo Larraín Nesbitt - Lawbird Legal Services
4th of June 2009
For all those who’ve not won the EuroMillion jackpot at some point or other in their lives they will need to apply for a mortgage loan to buy property.
After the emotional roller coaster of having waited for months on end (or even years) to buy your superb new place under the sun in Spain you may find yourself sitting at the Notaries office surrounded by smiling strangers waiting for you to sign on the dotted line on what for many is their life’s most important financial commitment.
At this point you may start to feel a familiar knot in the pit of your stomach. This is a situation that daunts many as you now have placed before you a written contract over 40 pages long scrambled in legal jargon, full of arcane mathematical equations and written in Spanish to top it off! It is then when you will look back in life and wished you’d taken Spanish in lieu of French at Grammar School.
The point 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 which will come to haunt you later on in life.
What is Regarded as an Abusive Clause?
For a clause to be deemed abusive under Spanish law two points have to be met:
- 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.
- 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.
An abusive clause can only be ruled so by a judge.
Top 10 Spanish Mortgage Abusive clauses
The following list is not a closed one, meaning I will only include the most common ones:
- Floor Clause - Basically in Spain most mortgage loans are referred to the Euribor rate plus a differential. If the Euribor goes up, you pay more, if it goes down you pay less; simple, right?
Wrong! This is when the nasty Floor Clause comes into play by which the lender secures for himself a minimum interest rate which normally ranges 3,5-4%. So even if the Euribor heads below said amount, you will still have to pay the said minimum interest rate. On the other hand to be fair, banks cap the top Euribor rate at an average of 10-11%. So even if the Euribor surpassed those levels you would only be obliged to pay the said rates.
This clause is the reason why many borrowers have realised unpleasantly this year that their mortgage repayments have not fallen as much as they were gleefully expecting.
What happens if I’ve already signed a loan with a floor 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.
- Developer’s Subrogation Clause - On buying off plan, this clause allows you to turn down the developer’s mortgage and take on any other mortgage that you may wish. It becomes abusive when you are charged 1% commission for cancelling the developer’s mortgage. 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 saving yourself on average 3,000 Euros or more in tax and associated expenses.
- Resetting of mortgage rate - This particularly abusive clause allows the bank 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 happens. 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 would be the lender being able to revise and adjust the mortgage rate on a quarterly basis if it benefits them whilst the borrower can only reset his biannually or annually.
- Mortgages to be repaid within the next 50 years - This isn’t really an abusive clause per se albeit you ought to know that on signing such a mortgage loan you will be paying on average more than twice the asking price of the property. Moreover, as I explained in my article on Bank Repossessions in Spain, after having paid for 25 years the loan you will have only paid for the interests on the capital not having repaid 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 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 they haven’t even repaid one cent of the capital after a quarter of a century!
- Imposing the Notary at completion - A borrower has freedom to choose any Notary in front of whom to sign a mortgage loan. Any clause that imposes the opposite is null and void and may be disregarded.
- Bank charges for non requested services which are tagged on to the mortgage loan - This happens when on signing the mortgage loan the 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 is only because the lender has added in these unrequested services which help to offset the financial shortfall for the loan itself. On removing them, the lender will immediately raise the applicable interest rate.
- Clause rounding off the nearest decimal point in variable interest rate 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.
- 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 banks’ as well (both lawyer and advocate).
- Clause by which the lender terminates the mortgage contract and initiates the repossession procedure, on the borrower defaulting one instalment - 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 free to initiate the repossession procedure.
- Clause by which the spread (diferencial) is increased significantly to compensate the Euribor's fall - In a deflationary economic environment as the current one in which the Euribor has hit an all time low lenders that did not include the floor clause mentioned above may choose to increase the spread charged on top of the Euribor rate so as to offset the shortfall in interests. E.g. from a starting spread of 1% tagged onto the Euribor they now raise it to 3% plus Euribor on the rate being reset. So on the right hand you are left with nothing and on the left hand nothing is right.
ADICAE (Banks and insurance consumers' association of Spain) estimates that 97% of mortgage borrowers are unfamiliar with fundamental elements of their own mortgage contracts. So just before you rush head-on to sign on the dotted line for a new life style under the sun maybe you ought to ask an expert, such as a lawyer or an experienced mortgage broker, to review it first.
Discuss this Article
Fri, Jun 19th 2009, 09:29
Sun, Jun 28th 2009, 10:53
I only wish people were far more familiar with such clauses. Currently all clients seem to be interested in is what the headline rate is.
As such many see no reason to pay for professional advice when it comes to taking a mortgage in Spain.
Agents involved often dont help. Here in Tenerife clients are usually dragged into the nearest bank and lumbered with any old product and told it is fantastic.
Only now, during such tumultuous times are many of these clauses enacted by banks and the borrowers have little or no idea why they ares still paying 6% when rates are historically low.
I am currently dealing with a few cases where a client wishes to remortgage/switch lender bu their current lender has added on upfront life insurance (to the tune of 20,000€ plus).
The bank wont cancel the insurance and insists it has to be kept even if the client switches lender.
Unfortunately since it is added to the loan upfront it will incur interest at prevailing rates for the full term of the mortgage (35 years in one case) more than doubling its actual cost!!!
Lawbird Lawyer Says:
Mon, Jun 29th 2009, 09:49
Thank you for your kind words.
I believe mortgage borrowers should always hire a professional, such as an experienced mortgage broker or a lawyer, to help them avoid costly mistakes.
It will be money well invested.
Raymundo Larraín Nesbitt
Glyn White Says:
Tue, Jul 21st 2009, 14:49
We have finally successfully swapped mortgage lenders from an annually reviewed rate with a "Caja" to a Monthly Euribor with an Ex Pat Bank.
Having been tied into insurance contracts with the previous bank, they were and still are listed as the beneficiaries. They say that these cannot, according to the "Ley" be closed until October. I fixed that for them - I canceled the DD.
This same bank, is now holding back 500 Euros, stating that there is another "Ley" about Quartely Liquidation Charges on cheques.
I think they make it up as they go along.
andrew sidley Says:
Wed, Jul 29th 2009, 13:22
if i buy a property in spain do i take on the debts of the previous owner
Lawbird Lawyer Says:
Wed, Jul 29th 2009, 15:11
Yes you do.
On community of owners debts, you are liable for debts dating back 2 years:
Comunidad de Propietarios: Avoid Problems with Your Neighbours in Spain - 26 Jun 2009
On buying a resale in a community, the new owner will be held liable for the prior owner’s communities’ debts for the current year of transfer of ownership as well as the natural year immediately precedent (art 9 e). The property itself will be burdened with a lien for unpaid communal debts.
Which is why under law, the signing of the deed of transfer of ownership requires a Communities’ certificate stating that communal fees are up-to-date for that unit, signed by the communities’ administrator. The purchaser can however waive this requirement voluntarily.
You will also be liable for IBI tax, garbage collection, mortgages, charges etc...
The lawyer you appoint to act on your behalf will make sure you complete with no outstanding liens, charges, encumbrances and community debts.
Trevor Cobb Says:
Mon, Jan 11th 2010, 05:48
I have found that when I agreed a new fixed rate of 4.7% over 3 years with the bank of andalusia. I recived a debit on my bank account of 2,551€ for adjust of euribor this is after I paid 6.5% in 2009.
When I asked the bank what this was I was told I had BET on the euribor rate. This year I will pay 4% intrest and because the euribor is now at 1.2% in December of this year I will recive a bill for 24,400€ because the euribor has gone so low. The bank has made it quite clear that I was gamling. I thought I was dealing with a bank not a casino with my morgage.
Lawbird Lawyer Says:
Mon, Jan 11th 2010, 11:46
Dear Mr Cobb,
You probably hired a Swap to offest the risks of interest rate fluctuations (in this case, Euribor).
This is a complex financial tool devised to act as an insurance should the Euribor climb/decrease too sharply.
The problem with it is that it´s a two-way street. If the Euribor rises steeply you are paid a premium by the insurance company, but if the Euribor rate decreases significantly ( such as now havibng reached a historicasl low) it is you who owes money to the bank.
I was very tempted to include swaps as abusive clauses but at the end I ruled them out.
There are thousands of unsatisfied customers who are now facing huge amounts on having hired these insurances. Many have sued their lenders. There are rulings going both ways. Some label them as abusive and other rulings are in favour of lenders (the most recent ones).
The problem lies in that customers, such as yourself, were perhaps not explained or disclosed fully what they were hiring, particularly what would happen if the Euribor fell dramatically. Swaps are a complex financial insurance that can act as a double-edged sword. When you hire them, you are indeed taking an educated guess or gamble on where the interest rate will be heading next.
Raymundo Larraín Nesbitt
Lynne Pain Says:
Tue, Apr 6th 2010, 12:56
We have a Floor rate of 5.5% which the Bank (Banco Popular says is not changeable. We negotiated an interest only period of 2 years but then find the bank charging us for Land registry fees of 250 euros though we can do the registration ourselves the Banco Popular say its Mandatory as is their Life ins, Their Home ins. and then another 105 euros to do with the registring of a 50,000 loan against a house worth still in excess of 350,000 Small Print is bad Small print in Spanish is impossible
Lawbird Lawyer Says:
Tue, Apr 6th 2010, 13:44
As explained in my last article, Advice to Struggling Mortgage Borrowers in Spain – 3rd February 2010, one of the solutions I propose is simply to swap lenders to waive bothersome collar clauses.
For example you have Banesto bank which is marketing really aggressively their mortgage "hipoteca smash". They offer to pay for ALL transfer expenses to switch over to them, including Notary, Land registry fees, cancellation commission of your lender, gestoría, surveyor etc.
You also have La Caixa bank offering an equally aggressive product "hipoteca rompe suelos" (collar clause breaker):
Let us know if we can assist you changing your mortgage to another lender or else renegotiating your mortgage terms and conditions and formalising it at a Notary public in a deed (called "novación" in Spanish).
Raymundo Larraín Nesbitt
Pierina Short Says:
Thu, Jan 6th 2011, 17:29
I live in Spain and have a mortgage, I have a life insurance policy which was taken out at the same time as the mortgage. Do I have to have this life insurance? I live in an apartment and I pay community charges every year which includes building insurance. Again, at the same time as I took out a mortgage, I have been paying a building insurance. Should I be paying this?
Your help in this matter would be appreciated. Thank you
Thu, Jan 13th 2011, 18:00
Thank you for your email.
We would need to review the mortgage documentation but it is likely that you are able to cancel this life insurance policy as it was not a legal requisite but just a a commercial condition that your bank insisted upon at the time they were considering your mortgage application.
I would therefore approach your bank and insist that you want to cancel the policy. Make sure they inform you in advance of what are the costs involved for the cancellation. Should you still be in need of instructing a Solicitor, please do not hesitate to drop us a line at info @ lawbird.com