Today’s mortgage market is kinder to borrowers
New laws governing the costs associated with mortgage applications came into effect in Spain in June 2019 and the good news is they favour borrowers! We take a closer look and pick out the key facts.
Why have the new mortgage laws been introduced?
The new laws were created as part of a European Union (EU) directive to standardise the mortgage market in all EU Member States, including Spain. The main aims are to improve the conduct and transparency of lenders and create fairer conditions for borrowers. For future reference, the full name of the law is ‘Ley 5/2019 de Contratación de Crédito Inmobiliario’.
What are the main benefits of the new mortgage laws?
Firstly, the new regulations make getting a mortgage in Spain cheaper. Under the old rules, borrowers were responsible for paying all the associated costs that came with a mortgage application. These include notary and land registry fees, taxes and other administrative fees, which together come to between 1.5 per cent and 2.5 per cent of the mortgage value. Thanks to the new rules, now the lender is responsible for covering these costs. Note, one item borrowers must still cover is the cost of the property’s valuation.
It is important not to confuse associated mortgage costs with the fees and taxes that come with all property purchases – these are linked with the actual transaction and typically are referred to as buying or purchase costs. Buying costs are always paid by the buyer and include transfer tax (or VAT for a new property), notary, land registry and administrative fees, and legal fees. Transfer tax varies across Spain’s regions, meaning the total of these costs can be between 8 per cent and 14 per cent of the purchase price, depending on where the property is located. But for budgeting purposes, a typical ballpark for these costs is 12 per cent.
More transparent paperwork
Another important benefit of the new regulations is the requirement for lenders to provide clearer and more detailed information when they present clients with a mortgage offer. A key document in any mortgage application, one that is now standardised in the EU, is the FEIN (Ficha Europea de Información Normalizada), also referred to as ESIS (European Standardised Information Sheet).
A FEIN must outline all the terms and conditions of the mortgage being offered to an individual borrower. It is a binding agreement and typically remains valid for between one and three months.
Other documents lenders are obliged to provide include the Standardised Warning Sheet (SWS), or FiAE (Ficha Europea de Advertencias Estandarizadas), which must show all the clauses of the mortgage, and a copy of the mortgage contract, which must include a breakdown of all the costs associated with the contract and who is liable for paying them (ie the lender or borrower).
Another document you will often see, which lenders provide to offer a snapshot of their deals and help borrowers compare products between different lenders is the Precontractual Information Pack, or FIPRE (Ficha de Información Precontactual). Like the FEIN, this outlines the headline terms of a mortgage, but it is not binding, and the lender can change the terms at any time.
Cooling off period and notary checks
To give borrowers time to read everything and avoid being pressured, under the new rules they should have at least ten days to review their offer and contract before they sign the mortgage deed during completion at the notary’s office. The ten-day cooling off period begins only once the borrower has approved and signed these documents and the lender has subsequently logged them in the notary system.
As an extra layer of protection, the rules also stipulate that borrowers should make a visit to the notary during the cooling off period, prior to the mortgage deed being signed. Referred to as ‘acta previa’ or ‘acta de transparencia’, during this visit the notary will go through the details of the mortgage, checking the borrower understands everything. The notary may not authorise the mortgage deed if they are not satisfied that this is the case or does not approve of abusive conditions.
Determining APR (TAE)
New rules for working out a mortgage’s APR (Annual Percentage Rate), or TAE in Spain, have been introduced, giving borrowers better transparency about how interest payments are calculated.
Under the new rules, the APR must be calculated on the basis that the loan is held for the full duration of the term. In addition, the calculation for a mortgage’s APR must take account of any set-up costs, bank account charges, insurance premiums and broker fees.
If the bank is offering mixed/combined rates that result in a reduction in the interest rate, the bank still must include both rates when considering the APR.
With all lenders working by the same rules, borrowers should be able to compare mortgage deals and APRs more easily.
Early repayment fees
Another welcome advantage of the new rules is more flexibility and a reduction in the costs associated with repaying part or all of your mortgage early. Now, borrowers can only be charged for a fee if an early redemption results in the lender making a financial loss. The lender must be able to prove and document any loss using a fixed formula.
In circumstances where a lender is permitted to charge early repayment fees or penalties, they must be capped as follows:
- With a variable rate mortgage, 0.25 per cent of the amount of capital being repaid if done during the first three years or 0.15 per cent during the first five years of the term, with no penalties applicable after this initial period.
- With fixed rate mortgages, 2 per cent of the amount of capital being repaid if done during the first 10 years and 1.5 per cent for any repayments during the remainder of the term.
- Although these are the maximum early repayment fees that can be applied, there are banks offering products with more favourable penalties or even none at all.
Linked or Combined product sales
Historically, it has been common practice for Spanish banks to require clients to sign up to other of their financial products when applying for a mortgage with them.
Under the new regulations, banks can longer force borrowers to agree to other products. They can do this only when the lender can demonstrate that the linked products it is offering offers a clear benefit to the borrower, usually a discounted mortgage rate. Typically, these products include credit cards, insurance products – including home, life and health, and current accounts.
Note that most lenders require borrowers to have a current account in Spain, in order that mortgage repayments can be taken by Direct Debit, and home insurance. But there is no obligation for borrowers to use their lender’s products and they should be free to use other banks for either of these. That said, it can be worthwhile using your lender for home insurance during the first year, as it easier in terms of time and paperwork. Some lenders also require life insurance as a security, especially when the mortgage is in only one name or there is just one income servicing the repayments.
Other key points
As well as the above, additional benefits of the new rules include:
- Foreign borrowers can request to have their mortgage converted from euros into the currency of their main income (if this is not euros). As a result of this rule, Spanish banks now look carefully at the currency foreign borrowers earn their income in and many limit their mortgage offers to borrowers who receive income in what are deemed stable currencies. This means some overseas clients are not able to get a mortgage in Spain. Speak to Hipoteken about your own requirements regarding currency and repayments. We work with several banks to ensure we can help as many people are possible!
- Mortgage brokers and advisors are better regulated. Mortgage brokers who advise clients and deal with personal financial information must be registered and meet certain regulatory requirements, compared to intermediaries who simply refer clients to a lender. Hipoteken is an independent mortgage advisor, qualified to offer advice and registered at the highest level with the valued ‘Asesoramiento’ accreditation.
- The costs involved with switching from a variable to a fixed rate mortgage, called novation, is capped at 0.15 per cent and can only be charged during the first three years.
- The process involved with changing lenders has been simplified and the costs lowered.
- Improved conditions for borrowers regarding late repayment penalties and the foreclosure process.
Got any questions about mortgage regulation and the application process in Spain, or any other general enquiry about mortgages?
Don’t hesitate to contact Hipoteken for a no-obligation chat with one of our experienced specialists.