Banks, not borrowers, must pay the costs
The Spanish government, under pressure from the EU, has clarified who must pay what in terms of costs when a borrower agrees a mortgage loan with a bank. Previously, all charges were paid by the borrower and they were onerous. Now all of the charges, except a valuation of the property, must be paid by the bank and the abusive minimum interest rate clause (la cláusula suelo) has been banned. The charges involved are:
- Notary and Registry charges for the mortgage deed. Typically, for a loan of €200.000 these would be in the region of €700 - €900 added to which there is usually an administrative charge of, perhaps, €150.
- Taxation. It has always seemed anomalous to me that a person who is in need of finance to purchase a property must deliver a proportion of the loan to the government in tax. And the way in which it is calculated is nothing short of outrageous. The rate is 1.5% of the loan. But not just the principal. All of the costs that might possibly be incurred in punitive interest, legal and court costs in the event that the loan was never repaid. This adds, typically, a further 50% to the principal so the true rate of taxation is around 2.25% of the loan. The borrower of our €200.000 loan has, in the past, had to pay around €4.500 in tax. This must now be paid by the lender.
So, the borrower will now save some €5.500 in costs when taking out a loan of €200.000.
How will the bank recover these costs?
Firstly by becoming much more efficient. Banks have been in a rush to merge since the crisisi of 2007-2008. And even some of the mergers, have merged again. Branches have been closed at an extraordinarily rapid rate. Internet banking has caught on and clients are no longer prepared to queue at branches whose practices had changed little in decades.
Secondly, by raising interest rates. Now that the minimum interest rate clause has been outlawed, a rise in lending rates is inevitable. With the effective abolition of charges to the borrower it now becomes feasible for borrowers to shop around and swap lenders if, at any future time, a different lender is offering better rates. Given that the original bank has incurred all of the taxation at the outset, it is likely that banks will need to introduce a scheme whereby a bank assuming a mortgage will need to repay the original a proprtion of the cost.
For anyone not familiar with the cláusula suelo, a mortgage deed might state, for example, that the interest rate is Euribor (the Euro interbank lending rate) + 1.5% with a minimum of 4%. This had no effect when Euribor was above 2.5% but Euribor has been below that level since the beginning of 2009 and became negative in March 2016. So for the whole of 2017 the bank was charging interest at 4% when Euribor +1.5% was euivalent to only around 1.3%. Various courts declared that this was illegal because the conditions had not been adequately described to the borrower prior to signing at the notary, which has given rise to thousands of actions against banks, almost all of which have been won by the borrower and the banks have had to repay excess interest charged since 9 May 2013, the date on which the Tribunal Supremo dictated that the practice was illegal if not sufficiently explained to the borrower prior to signing the loan agreement.
This was a political act designed to support Spanish banks, many of whom would have been unable to repay all of the excess interest from the time the cláusula suelo kicked in, in 2009. Although challenged by the European Union, a fudge was eventually agreed and the 2013 date confirmed.
I am happy to say I was one of those who sued and won a very substantial repayment!