The last few days in Spain has seen utter turmoil for the lending market and for lenders in Spain.
Back in February of 2018 a Supreme Court in Spain ruled that the passing on of land registry charges to the borrower was abusive and should be picked up by the Banks in Spain as the benefit of having the loan registered was the Banks .
At the same time they turned down a petition that Mortgage deed tax AJD was the responsibility of the lenders but remained something that the borrower would pay.
What is AJD mortgage tax
AJD tax is a tax payment set by the regional government on any Spanish loan deeds where they are signed at the Notary. As the Notary process is the only process that allows for a loan to be registered on the behalf of the lender it is not possible under current legislation for a loan to be secured any other way.
The beneficiary however of the tax payment is tax office.
AJD tax levels will vary from region to region and is on average 2% of the total loan responsibility. The total loan responsibility is often higher than the loan itself so it is not an insignificant cost.
New ruling in October 2018
In a further challenge to the findings of the courts in February, last week 3 Judges in the Supreme Court overturned the February decision and ruled that the Spanish lenders should be responsible for the mortgage deed tax not the borrowers. They also allowed for those who had signed a mortgage in last 4 years or so to seek recompense for mortgage deed tax they had paid.
Post the ruling a number of lenders acted immediately by either cancelling completions so they could adjust offered rates to compensate for the new cost or removed, as UCI did immediately, Spanish loan deed cost but held rates on offered loans.
Whilst the lenders might have been willing to accept the ruling going forward they all suggested previous clients should take their compensation claim to the tax office as finally the only person who benefited from having this income was the tax office.
At this point the Spanish government stepped in and demanded that the Supreme court in its totality, so all Judges , sat and reviewed their own decision and the current decree was suspended.
Where are we now
Until the 5thof November everyone sits in no mans land unsure of finally how this will all work out.
The immediate impact has been that every Bank has taken a different stance.
Some have cancelled completions altogether until the 5th.
Some have adjusted offers so will pay the tax but have put up rates with immediate affect and others have chosen to take the view that until the 5ththe legislation is as it was before and are making the borrower pay the tax at completion and maintain the terms offered.
All in all it is a mess with no coherent approach by the various Banks in Spain.
What will happen if the hearing goes against the Banks
Because profit from interest rates agreed always take into account the margin the lenders will make, any future cost going forward will be built into the interest rate payable so any benefit from not having to pay mortgage deed tax will be negated.
New interest rates, if the decision finally goes against the Banks, may in fact mean that borrowers are less well off. Whilst they will not have the upfront cost over the period of the loan they may pay more.
This is because the Banks will adjust rates to bring their total profit margin in line with the average time a loan is held rather than term of the mortgage.
Why would this be
The banks will say if we pay this tax and add say half a percent to the rate will we recoup the full amount of the tax cost over the average term a loan is held. This means if someone holds a loan over a longer period than the average loan term the extra interest cost will be higher than the saving.
What will then happen in terms of back claims no one can predict the exposure over the last 4 years is around 24 billion euros. The lenders are not going to take that sitting down and will quite rightly point any claimants back to the beneficiary who is the tax office.
Even if they have to make the back payments no doubt they in turn will take the tax office to court to get a refund from them.
Whilst it is justifiable to make Banks pay for, and allow a claim back for something they gained benefit from, like floor rates or in the UK unrequired PPI.
Whilst the linking of compulsory products contracted only with the specific lender in Spain is a time bomb waiting to hit the financial sector it does seem a tad unfair that the private commercial market should be made responsible to not only pay going forward but to back pay a tax that their only real role in is, as a tax collector on behalf of the government.