New mortgage law in Spain: final version

The new mortgage law has passed the final stage of a process of approval in the Spanish Parliament that has dragged on for more than a year and will soon come into force.

According to Juan Villena, head of the mortgage department at the real estate portal idealista, the main thing that the new law provides is clarity in the rules of the game in the mortgage market, transparency in the process of requesting a mortgage loan, providing comprehensive information to bank clients so that they can choose the most advantageous lending options for themselves.

Below are the major changes, both passed and rejected by Congress, and the key points of the new mortgage law.

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• Three months before entry into force.

One of the major modifications approved by Congress after the Senate amendments is a delay in the effective date of the law. This means that banks have three months (instead of the one month in the original version) from the date the law is published in the BOE to prepare for the changes.

In addition, as Congress sources explain, in order to launch the law, it is necessary to carry out certain legal procedures that the current government must complete before its dissolution on March 5, 2019. In particular, this concerns the adoption of regulations and a royal decree.

Banks will pay a tax on legally documented deeds (AJD), including for the first home.

The People's Party (PP) introduced an amendment to the text of the law to eliminate the mortgage tax (AJD), which banks are required by law to pay. The PP's proposal was to set the rate at 0% for first-time home purchases, but Congress rejected it. The financial sector will therefore be required to pay a mortgage tax at a rate of 0.5 to 1.5%. The rate varies depending on the autonomous community in which the home is located.

• Reduction of commission for early repayment.

According to the text of the law proposed by the Ministry of Economy under Luis de Guindos, limits were to be set on the fees charged by banks for early repayment of mortgages (both partial and total). In the case of mortgages with a differentiated (floating) interest rate, the limit was 0.25% during the first three years from the date of conclusion of the contract, and 0.15% if the early repayment occurred between the third and fifth years of the contract.

For fixed-rate mortgages, the Senate proposed a cap of 4% for the first 10 years of the contract and 3% thereafter. The parties eventually reached an agreement that the fee would be 2% for the first 10 years and 1.5% thereafter.

As for the opening fee, the new law does not set any limits. The text only notes that this fee will be paid once and will include all expenses related to opening a mortgage loan.

• No alternative insurance.

One of the amendments to the RR rejected by Parliament was a proposal to replace the obligation for customers to buy insurance policies that are permanent and renewable annually with an obligation for banks to offer customers an alternative insurance option on a non-permanent basis, so that they can choose between paying the entire amount for the insurance at once or making periodic payments. Under the final version of the law, banks will not be required to offer customers such an alternative.

• Professional independent appraisers.

One of the amendments to the RR, supported by Parliament, is related to the fact that additional security measures should be applied in the area of mortgage appraisal. For this purpose, the law sets out certain requirements that a housing appraiser must meet within the mortgage system. According to the text, "real estate appraisal must be carried out by a valuation company, a credit institution's valuation service and/or a certified independent professional of the lender or real estate lender in accordance with reliable valuation standards recognized internationally."

• Green mortgages rejected.

The concept of "green" loans and measures to regulate them will not be included in the final text of the law. These measures were intended to support and develop the use of renewable energy sources in residential construction. In this regard, it was planned to increase the interest of private capital in financing investment projects in the field of energy efficiency, water conservation, and the use and storage of renewable energy.

Other key points of the standard

• Who does the new law apply to?

From the moment of entry into force, the new mortgage law will apply to all new contracts for loans issued by individuals and legal entities implementing this type of activity on a professional basis, when the borrower, guarantor and surety is an individual, and the funds provided as a loan are intended for the purchase of residential real estate, as well as buildings for domestic use (garages, storerooms, etc.). In this case, this may concern both the purchase of finished housing and the construction of new housing.

The activity of providing mortgage loans is considered professional when the lender (an individual or a legal entity) brings its product to the financial services market.

• The client is obliged to contact a notary.

Another key point of the new law: the client is obliged to contact a notary before concluding a mortgage contract so that the latter can verify that the content of the contract complies with the law. The consumer has the opportunity to resolve any doubts that may arise before concluding the contract, which must be issued to him by the bank at least ten days before the expected signing date. In this case, the visit to the notary is free for the client, and as a result of this meeting, the client must sign a document confirming that he understands all the points of the contract and agrees with them.

The regulation does not establish specific deadlines for contacting a notary, but it is noted that the borrower must do this no later than the day before signing the contract. If this procedure is not completed on time, the notary issues a document recording this circumstance, and in this case the contract cannot be concluded.

• Obstacles to bank embargoes.

The new regulation contains measures to protect borrowers who, due to financial difficulties, are temporarily unable to pay their monthly installments. In order to avoid the bank initiating an embargo procedure, the parties agreed that the financial institution can activate the so-called early repayment clause for non-payment (llamada cláusula de vencimiento anticipado por impago) only when the payment has been delayed for more than 12 months, or if the amount of the debt exceeds 3% of the loan amount – in the first half of the mortgage contract, 15 months and 7% – in the second.

In addition, once the above limits have been reached, the borrower must be given at least one month to begin repaying the loan before the prepayment clause is triggered due to non-payment.

This measure will be retrospective, meaning it can be applied to mortgage contracts concluded before the new law came into force.

• The amount of the penalty is limited.

The default fee, according to the new law, will be calculated as follows: the interest rate paid by the client plus 3%.

• Elimination of unfair provisions in mortgage contracts.

According to the new law, all conditions will be abolished mortgage contracts, which contradict the conditions of transparency, i.e. nuances written into the contract by banks in a hidden, not clearly expressed form. We are talking about the "pitfalls" of mortgage agreements, due to which the borrower may subsequently suffer. In addition, the interest rate on the loan cannot be negative.

• The client pays for the assessment, the bank pays for the paperwork.

According to the new law, the costs of real estate appraisal are paid by the client, and the costs of transaction execution are paid by the bank. The latter pays, among other things, notary fees for the execution of the mortgage contract and entry in the Property Register. The costs of the copy of the contract are borne by the borrower.

• The conditions for offering additional banking products have been tightened.

The new law prohibits banks from obliging clients to purchase financial products from them, such as home or life insurance, when providing a mortgage. Such an offer can only be made to a client if it is truly beneficial to him (which the bank must prove). An example of such an offer is a reduction in the differential when concluding an insurance contract.

• Converting a floating rate mortgage to a fixed rate mortgage will become easier and cheaper.

The process of converting a floating rate mortgage to fixed rate mortgage will become simpler and more transparent for the client. The commission is limited to 0.15% of the previously paid amount during the first three years of the contract and 0.% starting from the fourth year.

• New conditions for foreign currency loans.

The borrower will have the right to convert a mortgage loan granted in a foreign currency into the currency in which he receives income or into the currency of the EU country in which he resides. According to the general rules, this is mainly the euro.

• The bank must analyze the client's solvency.

Under the new law, the bank will be required to conduct a thorough analysis of the client's solvency before granting him a mortgage loan, in particular, to analyze his credit history by contacting the Bank of Spain's Risk Information Center. Under the new data protection law, financial institutions can transmit the following information about clients: loan amount, contract date, contract term, current amount to be paid, type of loan, existing guarantees.