THE NEW MORTAGE MARKET
By Santiago De La Cruz
On 17 June 2018, the banks implemented the Mortgage Act that regulates the entire process of applying for a mortgage for natural or legal persons performing this activity in a professional capacity; when the borrower or the guarantor or warrantor is a natural person and the contract is intended for the purchase of a property for residential use; or when buying or retaining property rights over completed or projected properties, when the borrower or guarantor or warrantor is a consumer. This brought the signing of mortgage deeds to a halt in the months after the law came into force, and it is now, in this last quarter of the year, that we are seeing banks, notaries and clients dealing with the new regulations and struggling to comply with deadlines and requirements. Banks have to prepare two new documents: the ESIS and the FIAE. The ESIS is the European Standard Information Sheet, which must include all the specific and personalised information related to the contracted mortgage. The SWC is the Standardized Warning Card, which includes information on the most delicate clauses, including how interest is calculated if interest is variable, how multi-currency loans operate, cases in which interest is variable and has no ceiling, and cases of early termination and operability.
Banks must present both documents together with the typical repayment schedule for the loan interest rate, with the amount of each instalment, the payment schedule and a document that indicates the expenses associated with the deed. Within a period of ten days before the signing of the mortgage deed, the bank must make all this information available to clients via the e-notary collaboration platform, so that clients may access and check the information, and raise and resolve any doubts or questions that may arise. If the mortgage is signed before this period has elapsed, it will be declared void.
Once all the information has been received by the notary, the client must go to the notary office, and once any doubts have been clarified and questions answered, sign the acknowledgement test in the presence of the notary, which legally confirms that the client is fully aware of all the details and conditions of the mortgage contract. Having signed this notarial act in the presence of the notary, the client and the bank may sign the mortgage as from on the eleventh day after receiving all the information on the notary platform. So the client or their agent must go to the notary twice. Once to sign the notary test and again to sign the mortgage deed. As we can see, notaries are now subject to new requirements to provide information at no additional cost to the client or the bank.
The expenses that have to be paid by the customer are also regulated. In principle, these will be the valuation, although there are already banks that assume this cost, and the arrangement fee, which is not a charge prohibited by law. The bank assumes the cost of stamp duty and expenses corresponding to the notary, registration and processing. The law has prohibited banks from connecting or linking other products to the mortgage, although banks get around this prohibition by subsidising or partially reducing the rate of the mortgage loan, depending on the products that the client contracts. Home insurance is still a requirement, but the bank cannot oblige the client to take out home insurance with a particular company. Regarding unfair terms, the role of prior checking by the notary or the client’s advisors is paramount. Floor clauses and the application of minimum interest rates disappear, and evictions – following mortgage foreclosure – are only anticipated when the borrower fails to repay twelve monthly payments, or 3% of the capital, during the first half of the life of the loans; or fifteen monthly payments, or 7% of the loan, during the second half of the mortgage loan. Interest for late payment cannot exceed the agreed interest rate plus three percentage points, and repayment interest – the interest paid by the client cannot be negative (in other words, the bank will never pay interest to the client). The fee for early repayment is reduced, depending on the type of loan.
At 0.25% on the amortised amount for variable interest loans, if this occurs during the first three years; or 0.15%, if it occurs in the first five years and after these periods, depending on the option chosen, with no fee. With fixed-rate loans, the maximum fee may reach 2% of the amortised amount during the first ten years, or 1.5% if later, in cases where cancellation is to the bank’s detriment (if the market interest rates are lower at the time of cancellation than the interest rate agreed in the deed) Also new – and of special relevance in areas with foreign clients – is the possibility of converting the loan’s designated foreign currency to the currency in which the borrower receives their income, or the currency of the country in which they reside, which complicates the study of mortgages of citizens residing in countries that do not belong to the Euro Zone, because the exchange rate will be the rate established on the date on which the conversion is requested – at the prerogative of the client – and the bank will also be obliged to inform the client of the outstanding payment balance, and the right to re-convert the currency if the amount differs by more than 20% compared to what they would pay in euros.
Although the purpose of the law is to protect users/consumers and provide them with more information, with a view to stimulating more contracts involving properties, it seems that until the application and implementation of the law builds trust in lenders, it may result in limiting familys’ access to mortgage loans. At the moment, currency fluctuations and the weakness of certain currencies is leading to greater restrictions on mortgage loans for foreign buyers/investors, so we need to be careful before informing our foreign clients – outside the Euro Zone – about free accessibility to mortgage loans for acquiring a second home, and to mention to clients that they should consider where to establish their place of residence, where they generate their income, and the currency in which this income is received, in order to provide them with a realistic assessment of their situation that allows them to take well-informed and secure decisions when planning their investments.