New mortgage regulation in Spain
On June the 16th 2019 new Spanish loan legislation is to be embedded in law in Spain.
The new legislation is part of an ongoing EU directive to bring mortgages in Spain and all EU lending across member states into line and to improve the transparency and behaviours of mortgage lenders.
Spanish lenders in particular have come under scrutiny over the past few years for dubious activities like implementing floor rates ( the rate below which your rate could never fall) along with lack of explanation of the products and restrictions and lack of flexibility within the market.
Much of the new law is to be recommended as long overdue but as is often the case with new legislation much of what has been published has been put together by people who make rules but do not know how they will be implemented or the feasibility of implementing them and sadly parts the new mortgages in Spain legislation falls into this category in many aspects.
New rules that are intended to improve the situation for the end user actually become tick box procedures that in themselves are meaningless and for a few months there is no doubt much confusion will reign and many Spanish Banks will make knee jerk policies that may in fact be of detriment to potential buyers of property in Spain and indeed in some instances preclude some borrowers entirely.
The key changes are explained below but at present the implementation of many of these and how they will work is not clear. Even at senior branch level Spanish Bank staff are still unclear as to how the new procedures will be implemented, what each Banks legal teams have interpreted as requiring a change and which bits of the law are general guidance rather than specific changes.
Fipers will be replaced by a Fein
At present every client must be given a FIPER by the lender which outline the product terms and conditions and the TAE. The FIPER is being replaced by two documents one being a very client specific document now to be called the FEIN and the other a very general document outlining the general conditions the Bank offers.
The new FEIN is much more detailed than the old FIPER which related more to general information. The general information will include outlining the general options for types of products the Bank has on offer to ensure the client understands the type of Spanish mortgage product they could contract from that lender. This would relate to things like fixed rates, variable rates and mixed rate products.
The FEIN will need to include far more information than currently is the case and ensure the client understands the objectives of the loan being offered in far more detail.
As of yet no Banks have issued the new documents so it is still not clear exactly what information they will hold and how this will be explained.
Cooling off period
All documents pertaining to the loan offer including the new FEIN will have to be signed by the client and must be given a minimum of 10 days before signing. Any changes to the FEIN after it has been issued will require a new Fein and the 10 day clock will start again.
If a completion date is cancelled or delayed a new FEIN will have to be issued and the 10 day clock will start again.
This will have an impact on any client who requires a quick completion and or have very little time left on their private purchase contract to complete so having a mortgage approved in Spain before making any financial commitments and writing into a private purchase contract flexibility on completion dates will be even more important in the future than they are now.
In Cataluna it is already a requirement that you have a 15 day cooling off period and as this exceeds the minimum by law there is no reason to believe this will change in this region. Indeed other regions may chose to adopt a more stringent cooling off period rather than Cataluna going the other way.
Visit to the Notary
At present either the buyer and mortgagee or the POA for the buyer visits the Notary on day of completion to sign the purchase deed and the Spanish mortgage deed. It is required by law that a non speaking Spanish person has with them a translator who can explain to them what they are signing but there is no obligation beyond that.
As from the 16thJune the mortgagee in Spain or their POA must visit the Notary within the 10 days before completion and no later than one day before to answer a checklist of questions to ensure that the contract that is to be signed and the terms and conditions of the loan are understood fully.
It is not clear but it is believed that if you cannot personally visit the Notary your POA will be required to have passed a financial test to allow them to do this on your behalf. It is difficult to know how many Lawyers will be willing to undertake this to allow them to sign for a mortgage at completion so it must be assumed that no longer will a buyer be able to complete if they require a loan without making arrangement to travel themselves not only for day of completion but prior to this to visit the Notary.
This also means that arranging a completion day will become more fraught as the Notary must make time for this part of the procedure as well as the signing itself and this will need to fit in with what the Bank can do and when they can do it along with what the seller can do and when they can do it.
It will almost certainly increase the cost of the whole transaction higher Notary fees, flight costs and accommodation.
Abilty to change currency of the loan
One of the very grey aspects of the new legislation is where it refers to the allowing of a mortgagee to change at a later date the loan to a currency in which they get paid.
It is assumed this part of the law was to tighten up and protect people who chose where it was on offer a multi currency loan. Because of the way in which it has been written the law appears to actually make this a requirement for anyone contracting an euro loan who getS paid in a different currency.
A law designed to protect the consumer may in this instance have completely the opposite affect.
Lenders who do not want to have to make changes to the currency because they have bought in funds to fund the mortgage in Euros and their systems cannot make changes to effect the requirement may in the long term restrict who they will lend to and on what basis.
They may choose for instance not to offer fixed rates to certain clients as any cost to changing to another currency when the funds have been bought in at a set price would negate their profit.
They may choose only to lend to those earning incomes in Euros so as not to have the issue at a later date.
They may preclude certain currencies that are not mainstream currencies so stop lending to those from certain jurisdictions like the UAE.
To date at least one lender has already stopped taking loan applications from those earning money in Dirhams, one lender is telling UK nationals they are no longer providing non resident loans although in this instance it is not clear if this is related to Brexit and a concern of financial stability or the new currency law on mortgages.
It is also not clear and is yet tp be clarified what impact this change may have or who it may affect.
New requirements on how the TAE ( APR) is calculated and communicated are also coming into effect. This is one very positive aspect of the changes as previously it was very unclear on what had to be included and what was not. The calculation was also done based on year one so a loan in Spain contracted later in the year where costs were divided by less months was seen to be much higher than one contracted early in the year where the costs included were amortised over more months.
It is understood that the TAE will be calculated on a assumption the loan is held for the full duration, costs relating to set up fees and bank account maintenance charges along with any payaway to an intermediary will be included in the TAE.
The Banks have not defined as yet the calculation that will be used but the calculation will be the same for every lender allowing for a more reasonable and clear like for like comparison.
For many years now lenders have been able to insist on the applicant contracting compulsory products. Whilst by law they could never do this many would only lend if they were taken.
Going forward the Law is now more clear.
Spanish Banks will have to offer two options if they wish the borrower to contract their products one showing to cost and rates without compulsory products and one showing costs and rates with.
They will no longer be able insist you contract for instance life cover with them they will only be able to outline the benefits of doing so and compare for you the two options you have.
It will be possible for the borrower to use their own provider even for buildings insurance, which remains a legal requirement, and as long as the cover is satisfactory in its level to accept this but the lenders will be able to adapt rate to compensate for the loss of add ons.
Bank accounts will also still be required but charges for these will now be included in the TAE.
The loan costs which the borrower must pick up have been reduced by the Law. Most lenders in anticipation of this have already adjusted to the new requirements.
In a Royal decree Spain already had prevented banks from passing on the AJD ( Mortgage deed tax ) to the borrower and whilst not covered by the decree most lenders had stopped charging the Notary and land registry fees relating to the mortgage deed.
Going forward none of these costs will be able to be charged by the lender.
The only upfront charges the Banks can make will be arrangement fee taken at completion and valuation fee.
Early payment penalties
The cost of early repayment penalties will drop from a maximum of 0.50% first 5 years and 0.25% of subsequent years to 0.25% first 3 years or a choice have 0.15% penalty for up to 5 years. After this either way the penalty is 0%.
Spanish Banks will be able to charge more for fixed rates but only a percentage of an interest rate loss or capital repaid and whichever is the lower of the two.
In the instance of a fixed rate the maximum penalty will be 2% first 10 years and 1.5% for the rest of term. In reality most lenders are already less than this.
Maximum charges for changes to the loan so for instance moving the loan to a fixed rate from variable with the lender will drop to 0.15% although Notary and land registry charges will in this instance apply.
Lenders will be obliged going forward to allow a borrower to change the product type they have to encourage those on variable rates to take long term and more stable fixed rates.
The option to re-mortgage to a new lender will hold the same rules in reduction of cost to do so but at present no lenders are offering re-mortgage products so moving lender is near on impossible. Whether the changes encourage a re-mortgage market remains to be seen but what is clear is that your own lender will have to offer at any point the option to change from a variable to fixed rate and the cost of doing this has reduced.
Under the new law you will be able to repay early at any point with a minimum of one months notice to the lender.
Intermediaries will have more regulation in Spain and will fall into two categories. Those who only offer limited access to lenders and those who are able to offer access to the majority of the market providers.
The rules and level of information that must be given at outset will vary depending on which category the broker falls into.
For those only offering access to a specific lender the information given at outset will need to be more detailed than one who will access a number of lenders.
The point of a more wide scoped broker is to negotiate the best terms and conditions possible for each individual client taking into account the fiscal strength of the client, where the client is buying, loan to value required and what compulsory products they are happy to accept. This means at outset only general information can be given but at approval the information sent to the client will need to detail and outline all the information require for the client to make a decision as whether to proceed to valuation to generate a full offer.
Taking up front fees will be difficult for any broker who pertains to fall in the group of a level of independence as at that stage they will not have the agreed terms and conditions to comply with the new law on what must be shown.
Moving forward all brokers will either have to be registered with the local Junta if they only operate in that region or by the Bank of Spain if they operate across Spain.
The broker will have to be able to supply at outset the full details of the from in terms of address and a registration number and be able to demonstrate to the Junta or Bank of Spain their financial integrity, professionalism and knowledge along with written down internal procedures.
One issue with this is at present even with the Bank of Spain there is no information or procedure in place to allow a broker to make the registration making it impossible for a broker to meet the requirement by the date of June 16th.
At present Spanish lenders only have to wait for 3 months of arrears to start repossession proceedings.
Under the new law they will have to wait in the first half of the mortgage term for 12 months of arrears or 3% of initial capital and in second half of the life of the loan 15 months and 7% of the capital borrowed before commencing repossession proceedings.
Given the whole process can take a Bank up to 3 years to get from taking action to actually having the property transferred to them as payment of the debt this will hopefully encourage them to be more flexible and helpful in the situation where arrears are the case.
No lender is going to never take action and will still want to understand why the arrears have happened but where it is clear it is temporary issue like loss of current employment their first course of action maybe to assist the borrower until payments can be sustained again rather than taking immediate action.
From a maximum of 12% being added as penal interest in the event of arrears this will now under the new law be reduced to a maximum of 3%. The issue with penal interest being so high before was it was impossible for someone with a short term issue to ever catch up because for proceeding to not take place you had to pay all the arrears plus the penal interest. At 3% those with temporary issues who resolve them and want to get back on track the cost of doing so will be greatly reduced plus they will have more time to try and sort it.
Selling a property to cover a bad debt that was not of a temporary nature in three months was an impossible ask so this change will help all round.
It can be but hoped that the procedures and changes the Banks must make are made more clear in the coming days. At the moment in branch networks confusion reigns.