Mortgages are a useful legal tool that allows most would-be buyers the necessary financial means to acquire an overseas property. Spanish mortgage loans are similar to their UK counterparts with some nuances borrowers ought to be keenly aware of.
By Raymundo Larraín Nesbitt
Lawyer – Abogado
21st of February 2012
The purpose of this article is to continue the trend started in last month’s article (Spanish Mortgage Loans: Beware of Abusive Clauses) and shed some light on this often overlooked and obscure matter that may in time have such a large impact on our lives.
In this article I will focus specifically on real estate related mortgages.
A mortgage loan is an accessory contract, as the main contract is always the loan itself, which places a royal right against a real estate asset (whether movable or immovable) and is agreed upon in a public deed of registry. A notary public (notario) will bear witness and sign both the purchase deed and the mortgage deed along with borrower and lender. If a translator is necessary, they will also sign alongside. The deeds then have to be lodged before the Land Registry. The registrar (registrador) undertakes a second legal check before the mortgage is lodged. Both the notary and registrar are top-ranking civil servants who have attained a Law degree and have studied a very hard exam that can take several years to be admitted in their positions.
From the above, it can be surmised that a private loan that is not witnessed by a notary nor lodged at the land registry is not valid. In fact, any other mortgage loan that is drawn up afterwards and complies with the above legal formalities will always prevail against any former ones that lacked said formal requirements.
In Spain, prior to signing a mortgage deed, lenders are required to clearly lay out the essential elements of the offered mortgage in a document known as a binding offer.
Capital: this is the amount you are taking on.
Duration: it is the period within which you must settle the loan i.e. 20 years
Rate of interest: is the price of the money you are borrowing. The higher the interest, the more you pay on the long run.
There are many different types of mortgages. I will solely focus on this article on property- related mortgages and its main variations.
Fixed interest: As its name implies, the interest rate is locked throughout the duration of the loan. This has its advantages, such as giving forward visibility and not falling victim to fluctuating interest rates. It allows the borrower to plan ahead its monthly financial commitments eliminating any uncertainty as to what is owed to a lender each month. The main drawback is that the borrower will have to normally pay a premium throughout the life of the mortgage loan to offset the lack of risk and compensate for when interest rates are raised. This premium may be a couple of points above the current rate of interest.
Variable interest: The loan is normally referred or linked to an index which fluctuates over time. In Spain over 95 pc of mortgages belong to this type. Most of these mortgages are referred to the Euribor rate of interest which stands for Euro Interbank Offered Rate. It is the rate at which banks within the eurozone lend to each other (when they actually do trust to actually lend to one another…). The main advantage is that when interest rates are low, such as now, monthly repayments are also low saving borrowers considerable money on the long run. The disadvantage is that should rates rise, your repayments will follow suit thus increasing your monthly loan burden.
Spread (diferencial): In variable interest loans, points are added to the referred index. If you are non-resident in Spain this spread will be considerably higher to offset the risk of default as opposed to resident borrowers. The latter are considered “safer” as they already have assets within the country that can quickly be seized if necessary.
Interest-only (carencia): Some lenders may offer interest-only mortgages, particularly to young couples, as a teaser to entice them. In Spain these periods normally will last only a couple of years at most. It is a good idea for first-time buyers to get hold on the property ladder at a time when their source of income is precarious or low. Within the last years it has additionally been offered to struggling mortgage borrowers with the aim of easening up the financial burden of their repayments. In some cases to qualify you may need to demonstrate you are currently unemployed (sic).
Legal liability of a borrower in the event of default
This is a fairly important point that differs widely from its UK counterpart. If there is one milestone I want to highlight in this article, hands down it is this one.
In Spain, a borrower has a personal and unlimited liability which extends to all his current and future assets. The legal implications of this are very serious. Unlike in other countries, where in the event of the borrower defaulting the liability is limited to the value of the guaranteed real estate itself, in Spain the liability can have far-reaching consequences. A Spanish lender pursues the borrower himself, not the property, as the responsibility is personal. Additionally this implies that lenders pursue you abroad – and may seize – your home country’s assets for the shortfall incurred on defaulting on your Spanish mortgage loan. More on this in my article Spanish Creditors Pursuing Debts Abroad.
Because of how the legal system of repossessions is designed, biased towards lenders, a borrower can find himself owing a great deal of money to a bank after the underlying collateral, the real estate, has been repossessed. Unlike the UK, the deadline to repay this mounting debt does not expire, at least in practice. Compound default interest rates are added as well as the associated repossession expenses (i.e. lenders’ lawyer’s fees).
Formally a borrower’s responsibility on defaulting a mortgage loan is twenty years. However, in practice lenders may at any point in time interrupt this by means of a formal notification to the defaulter thus renewing the twenty-year deadline. Rinse and repeat and you may find yourself in the receiving end of a mounting debt spiral which follows you to your deathbed. Lenders outsource this debt-chasing to law firms who will make sure the debt remains always alive by contacting the borrower regularly, ensuring the twenty-year limit is always in order. The logic behind this, is that the defaulting borrower may come into wealth over time, i.e. inheritance, and may now be in a situation to settle his debt. In my humble opinion this system should be amended and borrowers should be given a chance to rebuild their financial lifes without turning them into financial pariahs.
Additionally, lenders will inform credit-rating companies, such as Experian, of your credit worthiness which may have a large impact in your home country. You can read further on the practical consequences in my article Bad Debtor’s List (‘Fichero de Morosos') The conclusion one can draw is that defaulting on a Spanish mortgage loan is a very serious matter that ought to be pondered very carefully and in my opinion ought to be avoided at all costs.
Fortunately in Spain debts are cleared on a debtor passing away (and naturally no one is sent to prison in Spain for bad debts). The exception to this rule is that debts can be inherited on accepting a troubled Spanish estate. At times it may be wiser to waive off the right to accept an inheritance if it implies the passive outstripping the rights and assets.
Dación en Pago
For all those who’ve slipped into mortgage arrears in Spain or are likely to and are thinking of handing back the keys as a solution, there’s a formal legal procedure to do it known as dacion en pago. For a property owner, a dacion en pago means basically handing back the keys to their lender (relinquishing property) and in exchange being discharged of the remaining mortgage debt. You can read an in-depth article on how it works in practice on reading Dación en Pago Explained or How to hand Back the Keys.
Unlike other countries, the dación en pago is not a legal figure that formally exists within our legal system. The procedure is loosely based on art 1.175 of the Spanish Civil Code and article 140 of Spain’s Mortgage Act . For the lender to accept it two conditions are required:
1. The property must not be in negative equity (no-negative equity rule).
2. The lender must not have started a repossession procedure against the borrower.
Even if you have slipped into arrears by some months, lenders will still accept a dacion providing you comply with the above two requirements.
When I first wrote an article on the matter, on the 21st November 2008, lenders were more open to the idea of a dacion. However, as the financial crisis has intensified and persisted over time, lenders have grown increasingly reluctant to the idea of accepting a dacion en pago. Only borrowers whose properties are significantly in positive equity territory are allowed to follow this procedure. Over the years they have raised the yardstick to the point it has become unattainable for most defaulting borrowers. There is now a social movement in Spain, which is gathering pace, to have the dacion en pago included as a figure in our legal system.
What many fail to see, is that a dacion implies huge expenses for a lender on accepting it not to mention the running expenses of keeping a property (i.e. Community fees and property taxes). To this you must add the huge provisions they need to set aside to cover the risk. The last thing Spanish banks need now is yet another repossessed property or dacion which act as financial millstones around their necks at a time where they are struggling to secure finance abroad. Hence their growing reluctance to accept a dacion, even if that means resorting to a repossession procedure.
For more advice on how to cope with mortgage repayments, please read my article Advice to Struggling Mortgage Borrowers in Spain.
Bank repossessions in Spain
This subject and its associated legal procedure is covered in detail by my article Bank Repossessions in Spain.
Lifetime loans or reverse mortgages in Spain
This subject is covered in my article Lifetime loans in Spain Explained, published in SPI on the 21st February 2011.
House ownership in Spain accounts for over 80pc of property. Owning one’s own property is deeply embedded in the Spanish psyche. Most buyers rely on a mortgage to finance their dream property. Make sure you fully understand the mortgage terms prior to signing a mortgage deed. Do not be afraid to ask any queries on the matter no matter how stupid they may seem to you.
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