The Dacion en Pago Procedure
For those unable to service their Spanish mortgage a dacion en pago (datio pro soluto), is one of the proposed solutions we highlighted on our previous article regarding Bank Repossessions in Spain (http://www NULL.marbella-lawyers NULL.com/articles/showArticle/home-repossessions-in-spain-defaulting-on-mortgage). Antonio Flores also mentions it on a recent blog post. (http://www NULL.marbella-lawyers NULL.com/blog-by-antonio-flores/cannot-keep-up-repayments-on-your-spanish-mortgage-not-all-is-lost/)
In plain English, dacion en pago means handing over the keys to the bank, and in exchange the bank will discharge all mortgage debt not holding you liable in the future. They will also renounce pursuing the debt in your home country or elsewhere against any other assets you may hold. This solution of last resort puts an end to many people’s growing nightmare as the mortgage debt mounts up and becomes unbearable. On you defaulting a mortgage debt in Spain, the debt goes personally against you, not against the property itself. That is why many defaulting borrowers are realizing with shock that in despite of the lender having repossessed their Spanish property, they may chase you back in your home country or elsewhere for the outstanding debt.
The dacion en pago involves you signing a deed at a Notary Public by which the bank commits itself not to chase you in the future for the debt and consider it discharged for good. The catch is that the property must not be in negative equity. This is actually more difficult than people think because due to the easy credit of the last years the loan-to-value of properties was very high, too high in fact, hence all the bank related problems we read on a daily basis with massive write downs carried out by Lenders. People borrowed far too much and now their properties may have fallen below their initial loan. If this happens, the lender will be reluctant to agree to this dacion en pago because the property will have no equity left. In this case if a solution cannot be reached the bank will repossess the property. Banks can sell the non-performing mortgage prior to it going to auction. Transfer Tax of 7% has to be paid on the value of the property as if it were a normal conveyance. Some banks will impose that this tax burden is borne by the borrower.
So if you are finding trouble keeping up with your mortgage repayments or you reasonably foresee you may fall in arrears soon and your property is still in positive equity you may suggest this option to your lender. However, it’s only up to the bank to decide on whether they are willing to accept it or not. Some banks are reluctant yet others will consider it although a specific case-by-case study will be required.
The bank will evaluate if this option is in line with its best interests and will determine the amount of equity left in the property commanding an updated appraisal if necessary. If the numbers stack up, they will accept it. You will both sign the deed at a Notary’s and that will be the end of the matter. We advise you to hire a lawyer to make sure your debt will be totally discharged; besides you will need an impartial translator acting for you.
It’s a win-win for both parties really. The borrower is free at last and has managed to secure successfully his assets abroad from the lender or any law firm or debt collection company they may hire to pursue the outstanding debt. The lender on the other hand will now own the property outright and will have successfully waived a lengthy and expensive court procedure (repossession) without having to apply provisions to the Bank of Spain to make up for this dubious loan. These provisions set aside by banks are being looked upon closely by credit-rating agencies post credit crunch.
You can read a detailed article on the dación en pago de deuda here:
The Dación en Pago Explained (https://belegal NULL.com/articles/showArticle/spanish-mortgage-dacion-en-pago-handing-keys-bank) – 28th March 2009
Lawbird Legal Services (http://www NULL.lawbird NULL.com/) offers this service at a flat fee of 1,392€ (16% VAT included). Travelling expenses may be applicable as well, depending on where the property is located in Spain.
I originally applied to my bank for help nearly 6 months ago. They keep saying they haven’t received any of my letters and have dragged their feet so that now the property is in negative equity and they wont accept it back as a Dacion en Pago.
All they want to do is for us to convert the mortgage to interest only. This would only be for a 12 month perio but would cost us 1400 euros for the notario. Then in 12 months time we would have to pay another 14oo euros. In addition, we would have the cost of airfares and carhire in order to go to Spain to sign the documents.
I am disappointed with the way the bank has behaved. They will not even waive the notario’s fees which would be helpful. They do not seem to understand that we are currently recieving just £75 per week in benefits.
My husband tried to kill himself earlier in the year because of the worry, because the bank are threatening to take our home in England.
We are desperate and there is nowhere to turn for advice or help, especially if you have no money. We have been trying to pay somehing each month but that is becoming impossible and the recession is not improving yet. It maybe some time before the work situation improves and stabilises.
What ever can we do?
Regards,
Geraldine TAylor
Dear Madam,
Maybe your lender is not accepting the dación en pago as your property may have slipped into negative equity.
Regarding what you comment on the fees involved to swap to interest-only you may want to read the following:
Spanish Mortgages: No Tax on Term Extension or Swapping to Interest-only – Friday, June 26th, 2009
http://belegal.com/wordpress/spanish-mortgages-no-tax-on-term-extension-or-swapping-to-interest-only/ (http://belegal NULL.com/wordpress/spanish-mortgages-no-tax-on-term-extension-or-swapping-to-interest-only/)
As for you being charged 1,400€ “for notaries fees” that is simply impossible or else a misunderstandment. As per law 2/94 notaries in these cases charge the lowest possible fee. Besides this operation does not attract Stamp Duty either as per my blog post above. There’s no need for you to travel over to Spain either, you can just appoint a lawyer acting as proxy to sign it on your behalf.
Regarding your bank threatening to take your UK home, sadly this is becoming all too common as borrowers continue to default on their Spanish mortgages. When interest rates are raised again in 2010 we will again witness a new surge of defaults.
Regards,
In the case of Dacion en pago, what is the position regarding Plus Valia Tax and Capital Gains Tax? Do these still have to be paid?
Ron, both taxes are applicable but generally, it is not likely that CGT would be applicable as there is generally no gain. Plusvalia is payable regardless of a taxable profit shown.
Thank you for your reply. Regarding the CGT, what is the position if the fiscal value of the property is far higher than the valuation on the property?
The reason I am considering asking for a Dacion en pago is because the fiscal value is double the price that I can get for the property. This means that by the time I have paid all the selling costs,paying CGT on an amount that I am not actually getting will completely wipe out the equity in the property and could if I’m not careful, leave me with a tax bill.
Normally there is no CGT, or very little, where the Dacion en Pago is operated. And normally, if the seller is non-resident, it is the bank who actually pays the 3% retention on account of the tax, given that the seller has no money to pay the mortgage repayments (let alone to pay taxes).
In any event, the fiscal value does not operate on taxes on selling as it does on buying, since whereas in the latter they apply an automatic valuer, on the former this never happens (2 different systems on different taxes).
I now find myself in trouble paying my mortgage and I think my only option is to hand back the keys and return to the UK. My husband has left me and I only receive 650 euros each month from my job which pays for food and bills for both me and my teenage son. I have asked to see the bank manager but I very worried he won’t want to help. About three years ago we had trouble paying and asked for a carencia but the bank told us this option was not something they offered. In the end they only offered a second mortgage that effectively paid the original mortgage and we just then had to pay the interest on the original mortgage plus a fixed period interest only payment for the second mortgage. We were charged fees and notary costs, etc which were all included in the second mortgage. It wasn’t the solution we had wanted but we didn’t have a choice. Now I find I am in trouble again but with no way out if the bank will not accept the keys back .
Please can you offer any advice to increase my chances of being successful??
Also, the mortgage is in my name and my husbands … But because he has left I am left negotiating everything, will the bank accept this? Any help will be really appreciated
Thanks Jo