New mortgage regulation in Spain
On June the 16th 2019 new Spanish mortgage regulation is to be embedded in law in Spain.
The new Spanish mortgage regulation is part of an ongoing EU directive to bring mortgages in Spain and all EU lending across member states into line. Therefore improving the transparency and behaviours of mortgage lenders.
Spanish lenders have come under scrutiny. Over the past few years. Firstly for dubious activities like implementing floor rates. ( The rate below which your rate could never fall). Also lack of explanation of the products and restrictions. Along with lack of flexibility within the market.
Much of the new Spanish mortgage regulation recommended is long overdue. However as is often the case with new legislation. Much of what has been published has been put together by people who make rules. Who do not know how they will be implemented. Nor the feasibility of implementing them. Sadly parts the new mortgages in Spain legislation falls into this category.
New rules intended to improve the situation for the end user become tick box procedures. These in themselves are meaningless. For a few months there is no doubt much confusion will reign. Many Spanish Banks will make knee jerk policies. Detrimental to potential buyers of property in Spain. Indeed in some instances preclude some borrowers entirely.
Key changes are explained below. However the implementation of many of these. Also 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 being required. How things will change Finally which bits of the law are general guidance rather than specific rules.
Fipers will be replaced by a Fein
At present every client must be given a FIPER by the lender . This outlines the product terms and conditions. Along with the TAE. The FIPER is being replaced by two documents. One being a very client specific document. In future this be called the FEIN. Secondly a document outlining the general conditions the Bank offers.
Under new Spanish mortgage regulation the FEIN is much more detailed than the old FIPER. Which only related to more general information. The information will include outlining the options for types of products the Bank has on offer. This is to ensure the client understands the type of Spanish mortgage product they could contract from that lender. For instance fixed rates, variable rates and mixed rate products.
The FEIN will need to include far more information than currently is the case. To 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.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. Must be provided a minimum of 10 days before signing. As a calling off period. Any changes to the FEIN after it has been issued will require a new Fein. The 10 day clock will then start again.
New mortgage regulation Spain states If a completion date is cancelled or delayed a new FEIN will have to be issued. This will include a 10 day calling off.
Mortgage regulation Spain will have an impact on any client who requires a quick completion. Therefore having a mortgage approved in Spain before making any financial commitment. Or contract flexibility on completion dates, will be more important in the future.
In Cataluna it is already a requirement that you have a 15 day cooling off period. 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.
Visit to the Notary
At present either the buyer and mortgagee or the POA for the buyer visits the Notary on day of completion. This is 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. Someone who can explain to them what they are signing. There is currently 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. No later than one day before. In order to answer a checklist of questions. Mainly to ensure the contract to be signed and the terms and conditions of the loan are understood.
It is not clear. However 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.Allowing them to sign for a mortgage at completion.It could be 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. Also prior to this to visit the Notary.
Arranging a completion day will become more fraught. The Notary must make time for this part of the procedure. Along with the signing itself. All of this will need to fit in with what the Bank can do. When they can do it. Also with the sellers availability.
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 grey aspects of Spanish mortgage regulation. Is the allowing of a mortgagee to change the loan to a currency in which they get paid.
Part of the law was to tighten up and protect people who chose multi currency loans. Because of the way in which it has been written. New law appears to make this a requirement for anyone contracting an euro loan. So affecting those who get paid in a different currency.
A law designed to protect the consumer. May in this instance have completely the opposite affect.
Lenders do not want to have to make changes to the currency. This is because they have bought in funds to fund the mortgage in Euros. Their systems cannot make changes to implement the requirement. This may in the long term restrict who they will lend to and on what basis.
Spanish Banks may choosenot to offer fixed rates to certain clients. Because of costs of changing to another currency. Fixed rate funds have been bought at a set price. Changing currency would negate their profit.
Lenders could choose only to lend to those earning incomes in Euros. So as not to have the issue at a later date.
Certain currencies that are not mainstream currencies may be precluded. Preventing lending to those from certain jurisdictions like the UAE. Spanish mortgage regulation could have an affect on on resident borrowing.
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. in this instance it is not clear if this is related to Brexit. So a concern over financial stability, or the new currency law on mortgages.
It is not as yet clear or clarified what impact this change may have or who it may affect.
TAE
Under Spanish mortgage regulation there are new requirements on how the TAE ( APR) is calculated. Also communicated. This is one very positive aspect of the changes. Previously it was very unclear what had to be included. Also what was not. The calculation was done based on year one. Therefore 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.
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, bank account maintenance and fees to an intermediary will be included in the TAE.
The Banks have not yet defined t the calculation that will be used.The calculation will be the same for every lender. Allowing for a more reasonable and clear like for like comparison.
Compulsory products
For many years 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 Spanish mortgage regulation is now more clear.
Spanish Banks will have to offer two options. If they wish the borrower to contract their products. They must make one offer showing costs and rates without compulsory products. As well as one showing costs and rates with.
They will no longer be able insist you contract for instance life cover. They will only be able to outline the benefits of doing so.
It will be possible for the borrower to use their own provider. Even for buildings insurance. Which remains a legal requirement. As long as the cover is satisfactory in its level. However the lenders will be able to adapt rates to compensate for the loss of add ons.
Bank accounts will still be required but charges for these will now be included in the TAE.
Costs
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. 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. Along with 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 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. However only a percentage of an interest rate loss or capital repaid. 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 already charge less than this.
Maximum charges for changes to the loan. So for instance moving the loan to a fixed rate from variable will drop to 0.15%. Although Notary and land registry charges will in this instance apply.
Lenders will be obliged 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 remortgage to a new lender will hold the same rules. Reductions in cost to do so. At present no lenders are offering re-mortgage products. Moving lender is near on impossible. Whether the changes encourage a remortgage market remains to be seen. What is clear is that your own lender will have to offer the option to change from a variable to fixed rate. The cost of doing this has reduced.
Under the new law you will be able to repay early, with a minimum of one months notice to the lender.
Intermediaries
Intermediaries will have more regulation in Spain. Brokers will fall into two categories. Those who only offer limited access to lenders. Secondly 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. In comparison to one who will access a number of lenders.
An independent broker can negotiate the best terms and conditions possible for each individual client. Taking into account the fiscal strength of the application. For instance where the client is buying Loan to value required. What compulsory products the borrower is happy to accept.
This means at outset only general information can be given. However at approval the information sent to the client will need to detail and outline all the information. To enable 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 falls into the independent group. This is because at that stage they will not have the agreed terms and conditions. Nor 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 their address and a registration number. 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 is there is no information or procedure in place. Allowing a broker to register. Making it impossible for a broker to meet the requirement by the date of June 16th.
Repossession
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 for 12 months of arrears or 3% of initial capital.In second half of the life of the loan 15 months and 7% of the capital borrowed. Before commencing repossession proceedings.
Given the whole repossession process can take a Bank up to 3 years. from taking action to actually having the property transferred to them. 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. Will still want to understand why the arrears have happened. But where it is clear it is temporary issue. Like loss of current employment. Lenders 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. Under the new law this is reduced to a maximum of 3%. The issue with penal interest being so high was to make it impossible for someone with a short term issue to ever catch up. for proceedings to not take place you had to pay all the arrears plus the penal interest. At 3% those with temporary issues, who resolve them. Want to get back on track then 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 was an impossible task 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.