Mortgages to come

At the beginning of October, the Minister of Economy, Luis de Guindos, said at the South Summit forum of entrepreneurs that “everything is ready” to approve the reform of the mortgage law, although it is not yet known when it will be implemented as the current political situation in Catalonia may delay a few weeks approval of one of the most expected legislative changes in economic matters. However, the changes to come are safe and financial institutions are already preparing for it.

The future changes in the Mortgage Law are more than important and are based on an improvement in transparency and clarity in the conditions and greater consumer protection in the event of non-payment, among other aspects, limiting costs. But for the new mortgages the most interesting thing is in the way of presenting the mortgage offers.

On the one hand, financial institutions must clearly show all the expenses, as well as the different scenarios they may face, such as interest rate variations. The client is also given more power to ask questions and demand all the information he or she deems necessary.

One of the most important advances, regarding this greater transparency, is that they have to present at least one linked offer separately from the unlinked offer (they can present different proposals with links) so that they can clearly choose between options. The problem is that the disparity of conditions between the two options can lead some customers to opt for the tied offer and worsen and raise the prices of loans with mortgage collateral that do not have it.

The second of the advances is that it puts an end to the obligatory nature of contracting certain associated products such as home insurance, salary direct debits, pension plans or credit cards, something that in practice was already done by banks.

With these changes, banks face the challenge of making attractive offers that lead to the hiring of more products. It should not be forgotten that in these years of financial crisis much of its income statement has been rinsed not precisely with mortgages, until its concession collapsed, but with the cross-selling of other products among which insurance has stood out significantly.

In this respect few are going to be the changes. And neither are they going to let pass, more with the increase in the granting of mortgages that we see month by month, the opportunity to use this tool to increase the contracting of insurances, payrolls, cards and even funds or pension plans.

In short, in the face of a more than likely rise in the price of unlinked mortgages, we must analyse more than ever whether the benefits we obtain are sufficient, taking into account the particular conditions of each mortgage.

Anyone who has taken out a fixed-rate mortgage in recent years has signed up to what is known as interest rate risk compensation, a surcharge that in some cases reaches up to 5% and which may currently be on the verge of extinction. This penalty as we know it can have days counted, because in the new mortgage law that will enter into force in the coming months provides for the existence of a single commission for early repayment.

On the one hand, they are allowed to apply the compensation for early repayment (limited by law) and, on the other, the commission for interest rate risk, although the latter must only be paid if the operation generates an economic loss to the entity.

But this will change as soon as the new mortgage law comes into force. As far as we know from these regulations, only a single commission will be allowed in the case of early amortization, which meets the characteristics of the two compensations that can currently be applied when the customer decides to return the money early.

Thus, according to the new regulation, the commission for early repayment in the case of fixed mortgages, whether total or partial, may not exceed the amount of the financial loss that the lender may suffer. In addition, during the first ten years, a limit of 3% of the capital repaid before time is imposed, while for the rest of the term, the maximum penalty allowed is 2%.

After the problems and conflicts generated by the banking entities in the matter of mortgages and the decision of the Government to implement the Law regulating the Real Estate Credit Contracts it is advisable to take into account before contracting a mortgage in order to avoid surprises and litigations in the medium and long term, the following aspects:

Mortgage expenses. The formalization of the mortgages demands a series of initial expenses that by custom always the client pays. The expenses generated from the registration of the property, the agency, the appraisal of the property, the signature before a notary and the tax of legal acts and documents, do not necessarily have to be paid by the person requesting the loan.

Commissions and floor clauses. They are not illegal in themselves, but their lack of transparency. The Supreme Court ruled nullifying these clauses in some cases because it considered that they had not clearly detailed to customers the consequences. Regarding commissions, some of them are regulated and limited.

Products linked to the entity. It is common for entities to offer home insurance services, pension plans or credit cards. Customers should be informed of the cost involved and whether it is advantageous or disadvantageous for them.

Read the fine print. Last but not least, the right thing to do is to read all the sections of the mortgage loan contract before signing it before a notary.

The consolidation of mortgage financing has been one of the key elements of the recovery of the sector. But since the beginning of the year, the different statistics that measure the health of the sector have intensified its pace and confirm the good times the sector is living. Let us hope that this recovery in the market will not be truncated by the political crisis in Catalonia.

Thus, those who are about to sign a mortgage loan should bear in mind that the mortgage context may change in the medium term, since the current level of low interest rates and historic lows of the Euribor will not be perennial, as demonstrated by the fact that the ECB will reduce its stimulus policy from January onwards.

We will have to wait to see what the new mortgage law will look like once and for all and what conditions it has for banking, because if institutions consider that they will make less profit from the sale of mortgage products, the granting of loans may suffer.