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How does the new Real Estate Credit Contract Law affect you?
SAVINGS AND INVESTMENT I July 30, 2020
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On 16 June 2019, the new Real Estate Credit Contract Law came into force. Law 5/2019 of 15 March, regulating real estate credit contracts, introduces Directive 2014/17/EU into Spanish law, regulating the customer protection regime and establishing the rules of conduct in mortgage loan contracts
This new law aims to reinforce legal certainty, increase consumer protection and the transparency and understanding of contracts and establish a more balanced distribution of costs between customers and financial institutions.
Thus, before providing a mortgage, a prior assessment of the customer by the banks is required in order to prove that the customer will be able to meet the obligations arising from the loan. Among others, their employment situation, current income, expected income over the life of the loan, assets owned, savings, fixed costs and commitments already made will all be studied.
In addition, the new Real Estate Credit Contract Law significantly increases the information that must be given to those who are going to take out a mortgage. Accordingly, the bank must provide the customer with the following documents at least ten calendar days before the time the agreement is to be signed:
- The European Standardised Information Sheet (ESIS), which will be considered as a binding offer for a minimum of ten days.
- A Standardised Warning Sheet (SWS), informing the borrower or potential borrower of the existence of the relevant clauses and components.
- In the case of a variable-rate loan, a document setting out the instalments you would have to pay under different interest rate scenarios.
- A copy of the contract, including a breakdown of all the costs associated with the signing of the contract, with details of which costs are borne by the lender and which by the borrower.
The new regulations also provide for a mandatory prior visit to the notary. Thus, the future mortgage loan recipients will have to go to the notary at least one day before the signing of the loan to receive free advice and to answer a questionnaire about the conditions of their loan. The notary may not authorise the mortgage deed if the customer does not pass this test and it is certified that the future borrower has received all the documentation. Notaries and registrars also may not notarise or register abusive terms or conditions.
What's new in this new standard:
- The sharing of costs between borrower and lender is defined. While previously the customer paid most of the costs associated with the mortgage loan contract, now the distribution is more equitable. Thus, the bank will have to bear the costs of administration, notary and registration, the payment of the Tax for Documented Legal Acts (TDLA) and its copy of the mortgage deed, while the mortgagee will pay for the valuation of the property and their copy of the mortgage deed.
- Floor clauses. These are eliminated. The law establishes by default a minimum rate of 0% for all mortgage loans, so even if the Euribor is negative, the interest to be charged cannot be negative.
- Opening fee. The bank may continue to charge this fee, but it will only accrue once and will cover all the costs of studying, processing and granting the loan.
- Practice of linked and combined sales. The new law prohibits the obligation to take out insurance or other banking products in order to obtain a mortgage. However, it allows two exceptions:
- Linked sales will be authorised when the bank can demonstrate that the products it offers bring a clear benefit to the mortgagee.
- The bank may require the borrower to take out insurance to guarantee compliance with the obligations of the loan as well as insurance against damage to the mortgaged property. However, the customer can take out these policies with other companies, without this leading to a worsening of the conditions of the loan.
In all cases, the bank must disclose the differences between the combined offer and the price of the products separately.
- Interest on arrears. While under the previous regulations the bank could charge up to three times the legal interest on money (a figure that in recent years stood at 3%) as interest on arrears, the new regulation limits it to remunerative interest rate plus three percentage points.
- Early repayment. The new legal text also reduces the early repayment fee, i.e. the fee charged when the customer wants to return the amount lent to the bank, partially or in full, before the agreed deadline. The financial institution can only charge this fee if the early repayment generates a financial loss, and the percentage will be different for fixed and variable mortgages.
Thus, in variable-rate mortgage loans the maximum fee for early repayment will be:
- 0.25% of the capital repaid in advance, if this occurs during the first three years of the loan.
- 0.15% of the capital repaid in advance, if this occurs during the first five years of the loan.
In the case of a fixed-rate mortgage loan, the maximum commission that the bank can charge for this concept is:
- 2% of the capital repaid in advance during the first 10 years of the loan.
- 1.5% of the capital repaid in advance for the remainder of the loan term.
- Novation. Banks may not charge more than 0.15% commission in the first three years of the loan's life in case of novation, i.e. a change in the loan conditions, such as a move from a variable to a fixed rate. After this period, the lender may not charge anything whatsoever for this concept.
How the new law affects you:
The new law will only apply to mortgage loans signed since its entry into force. However, some specific articles do apply retroactively.
Specifically, all mortgage holders will be able to benefit from the lower cost of changing from an adjustable to a fixed-rate mortgage loan, both via novation or through subrogation of the creditor and transfer of the mortgage to another bank. In both cases, the maximum fee that can be charged is 0.15%, but only during the first three years of the mortgage loan contract; after this period, the bank cannot ask for any payment.
Also applicable to mortgage loans prior to the new Mortgage Law is the article that establishes when a mortgage can be foreclosed upon in the case of non-payment. To begin the foreclosure process, the bank will have to wait until the amount of the overdue and unpaid mortgage payments is equal to:
- 3% of the loan capital or when 12 monthly instalments have not been paid, when the non-payment occurs in the first half of the loan period.
- 7% of the loan capital or when 15 monthly payments have not been paid, when the non-payment occurs in the second half of the loan period.
In addition, those who have signed a mortgage loan before 16 June will also be free to switch banks. Until now, when we wanted to subrogate our mortgage, if our bank made us a better or equal counteroffer, we had to accept it. This is no longer mandatory.
Now that you know all the details of the new regulations, if you are thinking of buying a house, take a look at Banco Santander's mortgage products.
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