10 Common Abusive Clauses in Spanish Mortgage Loans

Raymundo Larraín Nesbitt - Lawbird Legal Services
4th of June 2009

For all those who’ve not won the EuroMillion jackpot at some point or other in their lives they will need to apply for a mortgage loan to buy property.

After the emotional  roller coaster of having waited for months on end (or even years) to buy your superb new place under the sun in Spain you may find yourself sitting at the Notaries office surrounded by smiling strangers waiting for you to sign on the dotted line on what for many is their life’s most important financial commitment.

At this point you may start to feel a familiar knot in the pit of your stomach.  This is a situation that daunts many as you now have placed before you a written contract over 40 pages long scrambled in legal jargon, full of arcane mathematical equations and written in Spanish to top it off! It is then when you will look back in life and wished you’d taken Spanish in lieu of French at Grammar School.

The point of this article is to shed some light on the obscure legal clauses you should keep an eye on so as to avoid rash decisions that may lead you to unpleasant and costly mistakes which will come to haunt you later on in life.

What is Regarded as an Abusive Clause?

For a clause to be deemed abusive under Spanish law two points have to be met:

1. The clause must inflict harm on the consumer, whether financial or of some other nature. The consumer can either be a physical or legal person.
2. The clause must benefit the professional who’s drafted the contract within a business relation. This professional will be either a company or professional acting privately or publicly.

An abusive clause can only be ruled so by a judge.

Top 10 Spanish Mortgage Abusive clauses

The following list is not a closed one, meaning I will only include the most common ones:

1. Floor Clause - Basically in Spain most mortgage loans are referred to the Euribor rate plus a differential. If the Euribor goes up, you pay more, if it goes down you pay less; simple, right?
   
   Wrong! This is when the nasty Floor Clause comes into play by which the lender secures for himself a minimum interest rate which normally ranges 3,5-4%. So even if the Euribor heads below said amount, you will still have to pay the said minimum interest rate. On the other hand to be fair, banks cap the top Euribor rate at an average of 10-11%. So even if the Euribor surpassed those levels you would only be obliged to pay the said rates.
   
   This clause is the reason why many borrowers have realised unpleasantly this year that their mortgage repayments have not fallen as much as they were gleefully expecting.
   
   What happens if I’ve already signed a loan with a floor clause? You can shop around for another loan and swap over to another lender which doesn’t include this abusive clause. This clause is only included by an estimated 30% of lenders. So there are plenty of lenders to choose from which do not include them. Moreover with the amended Mortgage Act recently approved by the Government it is now considerably cheaper to swap lenders as the taxes and expenses involved have been significantly reduced allowing the consumer greater freedom of choice. Choice is the ultimate luxury in life.
   
   
2. Developer’s Subrogation Clause - On buying off plan, this clause allows you to turn down the developer’s mortgage and take on any other mortgage that you may wish. It becomes abusive when you are charged 1% commission for cancelling the developer’s mortgage. This clause is abusive and a purchaser under Spanish Consumer Law should not pay for this expense (Additional Disposition number 10.22 of Law 7/98 LCGC). This is a classic example set out in Spain’s Consumer Act, Law 26/1984.
   
   Notwithstanding the above, I must add that taking on the developer’s mortgage normally entails saving yourself on average 3,000 Euros or more in tax and associated expenses.
   
   
3. Resetting of mortgage rate - This particularly abusive clause allows the bank to automatically reset the mortgage interest rate when the referred index increases (i.e. Euribor) but requires the borrower to notify the lender formally when the opposite happens. This may not be a problem when you live in Spain but may become a real nuisance if you live abroad as you will surely skip the deadlines to notify the lender meaning you will not be able to benefit if the referred interest rate decreases. 
   
   A variant of this clause would be the lender being able to revise and adjust the mortgage rate on a quarterly basis if it benefits them whilst the borrower can only reset his biannually or annually.
   
   
4. Mortgages to be repaid within the next 50 years - This isn’t really an abusive clause per se albeit you ought to know that on signing such a mortgage loan you will be paying on average more than twice the asking price of the property. Moreover, as I explained in my article on Bank Repossessions in Spain, after having paid for 25 years the loan you will have only paid for the interests on the capital not having repaid the capital itself. Most Spanish mortgage loans follow the French repayment system which, unlike the German system, has this particularity that one ought to be aware of. Many borrowers, following this example, mistakenly think they’ve redeemed already half of the loan after 25 years, when the truth is that they haven’t even repaid one cent of the capital after a quarter of a century!
   
   
5. Imposing the Notary at completion - A borrower has freedom to choose any Notary in front of whom to sign a mortgage loan. Any clause that imposes the opposite is null and void and may be disregarded.
   
   
6. Bank charges for non requested services which are tagged on to the mortgage loan -  This happens when on signing the mortgage loan the lender throws in a bunch of unrequested services such as life covers, home insurance, pension plans or non requested credit cards. This is null and void as per Additional Disposition number 10.23 of LCGC.
   
   Having said this, the reason why an offered mortgage loan may be so competitive is only because the lender has added in these unrequested services which help to offset the financial shortfall for the loan itself. On removing them, the lender will immediately raise the applicable interest rate.
   
   
7. Clause rounding off the nearest decimal point in variable interest rate loans -  This clause will round off the figures in detriment of the borrower. This may not sound like such a big deal but when the lender rounds off the interest rate applicable on for example a 300,000€ loan to be repaid in 25 years time this can translate into thousands of Euros which are unduly added in on repaying it. This has been forbidden as from the 22nd of November 2002 onwards.
   
   
8. Clause by which the borrower pays all legal fees on litigation - This clause means that if the borrower decides to take their lender to court for whatever reason, no matter the outcome of the ruling they will have to pay not only for their own legal fees albeit additionally for the banks’ as well (both lawyer and advocate).
   
   
9. Clause by which the lender terminates the mortgage contract and initiates the repossession procedure, on the borrower defaulting one instalment - This clause is abusive and is fairly common in mortgage contracts. This may be highly unfair to the borrower as they may have defaulted or paid late one month for a legitimate reason, other than being penniless of course.  The law allows for the borrower to mend his delinquency and repay the owed amount with the accrued delay interests. If after three months the situation remains unchanged the lender is free to initiate the repossession procedure.
   
   
10. Clause by which the spread (diferencial) is increased significantly to compensate the Euribor's fall - In a deflationary economic environment as the current one in which the Euribor has hit an all time low lenders that did not include the floor clause mentioned above may choose to increase the spread charged on top of the Euribor rate so as to offset the shortfall in interests. E.g. from a starting spread of 1% tagged onto the Euribor they now raise it to 3% plus Euribor on the rate being reset. So on the right hand you are left with nothing and on the left hand nothing is right.

Conclusion

ADICAE (Banks and insurance consumers' association of Spain) estimates that 97% of mortgage borrowers are unfamiliar with fundamental elements of their own mortgage contracts. So just before you rush head-on to sign on the dotted line for a new life style under the sun maybe you ought to ask an expert, such as a lawyer or an experienced mortgage broker, to review it first.

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The article 10 Common Abusive Clauses in Spanish Mortgage Loans was originally published on belegal.com.