Anyone signing for a new mortgage since the 17th June 2019 will have noticed a dramatic change in processes now that legislation has introduced a complete overhaul of the home loan system covering who pays what, how applications are approved, and what the lender can and cannot do.

A European Union directive means that practices across the 28-country bloc are now streamlined, meaning fewer ugly surprises for those seeking to buy new homes in a nation that is not their own.

The major overhaul has made borrowing and home ownership safer and more thorough, and has also seen costs come down.

Approving applications: Customer solvency

Until now, in Spain, the amount of the mortgage loan agreed would be based entirely on either the bank’s survey value of the property, or its market value, or a combination of both, normally with between 60% and 80% of the lower of these two being the maximum offered.

Pre-financial crisis, the survey value was the main factor, with affordability for the owner being secondary or even not considered in some cases, meaning widespread negative equity when artificially-inflated prices suddenly plummeted.

Also, customers with limited financial knowledge often found they did not truly know what they were buying.

The new law changes all this: the lender is required to carry out an exhaustive evaluation of the applicant’s solvency, including his or her work situation, current income, assets if any, savings, regular expenses and other financial commitments such as car finance or personal loans, plus any other likely outgoings that could crop up during the term of the mortgage.

This means if the loan term is likely to extend beyond retirement, the buyer’s likely pension income will be taken into account.

Irrespective of the sale price, market value, survey value or predicted fluctuations in any of these, a bank is only permitted to grant a mortgage if its evaluation indicates the borrower will be able to make the payments.

Where a mortgage loan is denied, the bank is required to give written explanations ‘without delay’, the law states.

Customer knowledge

All advertising for mortgages must clearly indicate the rate of interest applied, expenses involved, amount of monthly payments, total amount which the customer will have paid by the end of the term, and whether or not the borrower is required to take out insurance.

Banks can make it compulsory to take out life insurance, buildings insurance or both, as a mortgage condition, but are not permitted to force customers to purchase their own insurance products – as long as these provide the cover required, they can be taken out through any provider the borrower chooses.

All details of products offered by the bank itself must be explained until the lender is satisfied that the customer totally understands the terms and conditions and is in a position to make an informed choice.

Lenders are permitted to sell combined packages of mortgages with other products, such as deposit accounts, credit cards or pension plans, attracting a discount on mortgage repayment interest, but ‘hard-sell’ practices are not permitted and exhaustive explanations are required.

Borrowers will now make two visits to the notary rather than one – the final visit, for signing documents and handing over deeds to the property, has always been necessary, but a new, earlier visit to give the customer full and free advice is a requirement of the contract.

The homebuyer can attend the notary of his or her choice, and will be given a complete explanation of the purchasing and mortgage process and all details of the loan including a full breakdown of contract terms, and be given help and answers to questions.

Afterwards, the customer will sit a small test to check his or her understanding.

For this, the tab is picked up by the bank, since it is in the lender’s best interest to ensure the customer is fully aware of what he or she is getting into.

During the final notary visit, as well as during the first, the consumer is able to ask for any issues or queries to be clarified before signing the contract.

‘Floor’ clauses and other unfavourable terms

In recent years, some banks have found themselves forced to refund borrowers for overpayment of interest due to ‘floor clauses’, which effectively mean that if the Euribor – or Eurozone interest rate, upon which mortgages in Spain are based – goes below a certain figure, the customer does not benefit; effectively, a ‘bottom’ cap on interest for variable-rate mortgages.

Capped rates which stop interest climbing above a certain level are still permitted, as are fixed-rate loans if the customer wishes, but no lower limit on interest rate can be set.

This said, if the Euribor is in minus figures – as it has been since February 2016 – this will never mean ‘reverse interest’ on the mortgage repayment, or banks ‘paying’ customers for having their loans rather than receiving interest on top.

Interest rates on mortgages can be set at 0% if the bank so decides, however.

In Spain, by contrast to other countries, a variable-rate mortgage is far less insecure: loans are reviewed annually and the new figure set for the year, meaning a sudden spike in interest from one month to the next does not affect the customer. This provides a safety net, since if the customer sees that interest rates are starting to take an upward trend, he or she can opt for a fixed rate ahead of the next review to avoid skyrocketing payments in the future.

Interest rates have remained relatively stable and very low in the Eurozone for several years, however, and there are no medium-term plans for any sharp increase – in fact, increases have nearly always been very gradual – which takes a large chunk of the financial uncertainty out of signing for a mortgage.

Lenders can still charge a late-payment interest where monthly mortgage repayments do not go through on the required date, but this is severely restricted – now, the penalty is capped at three percentage points on top of the existing interest applying.

In past years, particularly during the crisis, some banks would automatically up interest on repayments to as high as 18%, often for just one missed monthly instalment, leading those already struggling into further debt – but such practices have since been outlawed.

Banks, in practice, whilst mortgage repayments are collected on the first working day of each month, will normally wait until around 6th or 7th of the month before charging interest, since companies are legally obliged to pay monthly salaries no later than day six.

Repossession for non-payment

Spain’s new mortgage law is largely in response to the repossession crisis which was particularly severe in 2012, one of the worst years of the recession, and which eventually led to certain banks and even entire towns declaring themselves ‘repossession-free zones’.

Some banks would send repossession notices after just one or two missed payments, but others, recognising that as well as the social responsibility aspect, taking a person’s house off them leaves nobody a winner, opted to exhaust every possible solution through negotiations with the owner – payment holidays, to cover periods of unemployment; interest-only payments; capped payments; extended terms, and so on.

All banks in Spain are morally obliged through the new Code of Good Practice to negotiate first, but the new mortgage law in force from this week means the customer has a long stay of grace before repossession proceedings can even start.

During the first half of the term of the mortgage, ‘repossession’ does not even enter the lender’s vocabulary unless and until 12 monthly repayments have been missed and remain unsettled, or 3% of the full amount of the loan.

In the second half of the mortgage term, the customer must have missed 15 monthly repayments and still owe these, or have failed to pay 7% of the capital.

It is not yet clear whether it is the lower, or the higher, of these two figures – number of monthly payments or percentage of capital – that will apply.

The law does not cover a customer’s right to hand back the keys of his or her home in exchange for wiping out the debt, but both parties to the contract are able to agree to this voluntarily in cases where the owner is in negative equity or has no equity at all and is unlikely ever to be able to meet repayments.

Costs: How much, and who pays?

The customer only pays the cost of the property survey, plus the bank’s costs and commissions for setting up the loan.

Drawing up the deeds is an expense paid by whichever party asks for this to be carried out.

Now, the bank must fund the notary’s costs, legal assessment, entering the details onto the property register, and the tax on asset transfer.

Commission payable to banks is described by the new law as being those which apply to ‘loans explicitly requested and expressly accepted by the consumer’ and ‘provided that these costs are in exchange for services actually provided or expenses incurred which can be accredited in writing’.

It is estimated that the average borrower will save between €500 and €1,000 compared with previous costs involved.

Customers are permitted to reimburse all or part of the loan without paying commission within a certain period of time, although a small redemption penalty may be applied in respect of the bank’s financial losses for the termination of the contract when the reimbursement takes place within the first few years of the loan.

Commission for setting up the loan must be agreed between both parties before signing, and must be a one-off figure which covers all examination, administration and approval processes.

Early repayment of a variable-rate mortgage is capped at 0.15% for the first five years or 0.25% in the first three years, but only one of the two may be applied at once.

Redemption penalties within the first 10 years may not exceed 2% of the amount of the repayment, and cannot go beyond 0.15% after the first 10 years.

In the event of switching to another bank for the mortgage loan, signing it over to another party, or changing between fixed- and variable-rate loans, redemption penalties must not exceed 0.15% of the reimbursement within the first three years, and no commission can be requested from the fourth year onwards.

But the consumer will still have to compensate the bank for the proportional amount of taxes and expenses it incurred when the loan was set up.

Paperwork

If the bank approves the mortgage application, it is required to supply the customer with certain documents within 10 calendar days before it is finally signed.

One of these is a Europe-wide standardised file with full information about the consumer and loan features, which forms the basis of a binding contract and cannot be changed by the bank unless this results in a more favourable situation for the customer.

Another document details all contract clauses and references used for setting the interest rate applicable.

For variable-rate mortgages, the lender must produce a document showing simulations of monthly repayments in the event of different hypothetical interest rate change scenarios.

All expenses and commissions paid by the lender and the borrower must be broken down in full, and the terms and conditions any mandatory life or buildings insurance policies must include are to be given in detail.

The customer must be expressly informed of his or her obligation to receive free notary advice during an initial visit, and of the right to visit the notary of his or her own choice.

Finally, the borrower must present a file to the notary containing all the documents received by the customer and a signed declaration showing the borrower has, indeed, received these, that they have been fully explained, and that he or she understands them sufficiently.

Currency

If a customer takes out a mortgage in a currency other than the euro – for example, a British buyer who contracts a mortgage in sterling via a bank in Spain – he or she has the right to change the currency of the loan to euros if the majority of his or her income or assets are, in fact, in euros.

The exchange rate that applies will be that set by the European Central Bank (BCE) on the day the currency conversion is formally requested.