Mortgages and loans
Most people who decide to buy a home need to apply for a mortgage loan from a financial institution in order to cover the payment. The first step to be taken, then, is to find out full information the about existing offers and the obligations you will be entering into.
There are two different and complementary elements:
- A main mortgage contract, through which a person or entity (the creditor, typically a bank or savings bank) lends an amount of money to another (the debtor).
- The mortgage, which is the guarantee that the debtor, or another on his/her behalf, provides to the party lending the money. It comprises a real estate property (or several) being offered and established as surety that the loan will be repaid, which means that if it is not repaid on the established dates, the bank or savings bank could, through an abbreviated procedure, sell off the mortgaged property by public auction to collect the amount owed, with any surplus being used to pay other creditors or, if there are none, to be handed over to the debtor.
As the bank or savings bank has a particularly effective guarantee, namely the mortgaged property, it can grant the loan over a longer term and at a more advantageous interest rate than for a personal loan.
The property, unless it is sold in the event of non-payment, is still owned by the debtor, who can sell it, lease it or remortgage it.
This is not the only possible form of guarantee. The financial institution often requires in addition to the mortgage a guarantee comprising one or more people in support of the debtor, undertaking to make payments if the debtor does not.
Universal liability: It should be remembered that the debtor taking out the loan is liable with all his/her present and future assets for payment of the mortgage loan. If the sale of the mortgaged property does not raise enough to cover the debt, the banks that granted the loan will demand that the debtor make the payment with any other assets that he or she might own at that time or in the future.
Liability limited to the mortgaged property: Nonetheless, there are now banks that grant mortgage loans under which the liability of the debtor is limited solely and exclusively to the mortgaged property, releasing any other assets that the debtor might then or in the future have in the event of non-payment of the loan.
These are the steps to be followed by a private individual with a bank or savings bank to acquire a property. This is the most typical case, although it would apply to any loan with a mortgage. This is general advice. Remember that it is advisable to contact a notary if any questions arise, since he/she will be involved in any mortgage and is the individual able to offer you independent, impartial advice, free of charge, about any aspect of the mortgage loan.
Issues of interest:
- What amount to request: It is necessary to take into account only the property’s purchase and sale and valuation costs, since the financial entity is obliged by law to pay the tax, the registration invoice, the notary's invoice and the management invoice, that is to say, that the mortgage loan should only involve the valuation costs.
In addition, it should be kept in mind that credit institutions may not lend more than 60% of the valuation of a mortgaged property, except for the financing of the construction, restoration or acquisition of property, for which it may reach 80% of that value.
- Obtain information from various credit institutions: Given the importance of the operation, you should not simply talk to the bank or savings bank that you have always dealt with. It is important to compare different offers. Basic issues are:
- The fees charged by the bank
- The interest rate applied: whether it is fixed or variable. It is variable, the reference index (Euribor, IRPH...); the differential to be added to the reference index (the differential is a fixed percentage that is always added to the reference index)
- The repayment term
- Basic information about a mortgage loan
- The capital granted.
- The repayment term: number of instalments, frequency of payment, amount and date of payment, as well as the implications of partial repayments.
- The interest: initial nominal rate, the reference index for subsequent adjustments, the margin to be added to the adjusted interest rate, with information about the maximum and minimum interest rate and the maximum and minimum amortisation payment, as well as an amortisation table.
- The fees.
- Possible related products: subscribing fire, life and interest variation insurance, etc.
Main characteristics of loans
Interest: This is the price paid for the loan. The bank is not only repaid the amount loaned, but also a percentage of the debt owed at the time in question. This percentage is the interest, or the bank's profit from lending money.
The interest may be fixed, if it is agreed that it will remain unchanged throughout the lifespan of the loan.
The so-called "cost of money", or interest, varies in the marketplace. In case of variable interest, the evolution of the reference rate selected by the bank and its current value should be examined. In addition, it is very important not to forget to add a differential, which is usually established by the bank, to the reference rate.
It is likewise very common for variable interest loans to establish an initial period (the first year or the first six months) during which the interest is fixed (although an initial fixed interest rate may also be agreed for more than a year, followed by a variable rate modified every year or half-year). It should be borne in mind that this initial rate is very often lower than the rate that will subsequently be applied, which means that the first instalments, during the fixed interest period, will be lower than the subsequent payments once the interest rate has been adjusted resulting from the interest rate review.
The APR: To compare the various offers it is very important to note the “Annual Percentage Rate” (APR), which is the rate that is actually paid, taking into account the fees charged by the financial institution, and the form and time of the payments (monthly, quarterly or in advance): these various options mean that the amount you actually pay over a year will deviate from the amount you would have paid taking into account only the nominal rate.
The APR could be described as the “real” interest rate on a loan, because it includes not only the nominal interest, but also other expenses, and how repayments will be made. To compare the costs of a loan, rather than looking at the nominal rate, you should focus on APR: having analysed two loans, if you find one has a higher APR than the other, then it will be more expensive, even if the nominal interest rate is lower.
To find out the current rate of the main references for mortgage loans, go to: http://www.bde.es/clientebanca/productos/hipotecas/cuanto/cuanto.htm
Choice of notary
Once the binding offer has been accepted, the bank will send the documentation to a notary in order to prepare the loan public instrument. It is very important for you to be aware that from 16 June 2019, the date of entry into force of the Real Estate Credit Act, you have 10 days to meet with the notary you have chosen before the date of authorisation and signature of the loan public instrument.
How will the notary help you?
Transparency rules: The borrower, guarantor and warrantor will be given personalised information to compare the loans in the market, evaluate their implications and make an informed decision on whether or not to enter into it, at least 10 calendar days prior to the signing of the contract; this period is unavoidable. The documentation consists of:
1. - European Standardised Information Sheet (ESIS): which will be considered a binding offer for the entity during the agreed period until the signing of the contract, which must be at least 10 days.
2. - Standard Warnings Sheet (FIAE): That will report:
- The relevant clauses with the official reference indices used to set the interest rate.
- The existence of minimum limits on the interest rate due to downward variation.
- The anticipated maturity due to non-payment and the expenses arising from it.
- The distribution of expenses associated with the loan.
- In the case of a variable rate loan, it shall contain a separate document with reference to the periodic instalments to be paid in different interest rate scenarios and, where appropriate, the financial risk hedging instruments to be taken out on the date the loan is granted.
- If an initial commission is agreed, it will be accrued only once and will include the costs of studying, processing or granting the loan or other similar expenses.
3. - Copy of the draft contract: Its content shall conform to that of the preceding documents and shall include, in a detailed manner, all the expenses associated with the contract.
4. - Expenses: Clear and accurate information about the lender's and borrower's expenses.
- The valuation cost is borne by the borrower and the lender’s administrator.
- Notary fees are borne by the lender, and copies of documents are borne by the requesting party.
- Registration fees are borne by the lender.
- The ITP (Capital Transfer Tax) and AJD (Stamp Duties) are borne by the lender.
5. - Insurance: When the borrower is required to take out insurance to guarantee the obligations of the loan, or damage insurance on the mortgaged property or other insurance provided for by mortgage market regulations, he/she shall convey in writing the conditions of the insurance guarantees required to the borrower.
6. - Advice of the notary: The warning of the obligation to receive personalised and free advice from the notary chosen by the borrower to authorise the mortgage loan, on the content and consequences of the information contained in the documentation provided.
Reception and referral to the notary: This documentation, and the statement signed by the borrower indicating that it has been received and its contents explained, must be sent to the notary chosen by the borrower through telematic means for:
- Reliable verification of the date of incorporation into the computer application available to the notary.
- Guarantee that no direct or indirect costs are incurred by the customer.
- Extract the documentation to prepare and authorise the record and the public instrument.
Notarial act of presence: The borrower, guarantor and warrantor must appear before the notary chosen by the borrower, at least the day before the signing of the loan, to be advised, after verifying that the documentation has been delivered on time and with all its contents. If it is so accredited, the notary shall record it in a free notarial act, prior to formalising the mortgage loan:
- Compliance with the legal deadlines for making the above-mentioned documents available to the borrower and guarantor.
- The questions raised by the borrower and the advice given by the notary.
- That advice has been provided on the specific clauses of the ESIS and the FIAE, on an individual basis and with express reference to each one, a generic statement not being sufficient.
- That, in the presence of the notary, the borrower has responded to a test that will specify the documentation delivered and the information supplied.
Refusal of the notary to authorise the mortgage loan public instrument: If the delivery of the information referred to is not accredited in due time and form, or if the borrower, guarantor, and warrantor if applicable, do not appear to receive the advice of the notary, the latter shall express this circumstance in the notarial act and shall not authorise the mortgage loan.
Related sales: The Law, except for the stipulated exceptions, prohibits related sales in general. These sales are those in for which, in order to grant the loan, it is mandatory to contract other products or services.
Real estate loan in foreign currency: The borrower has the right to convert it to the alternative currency provided for by Law.
Variable interest: You cannot set a downward limit of the interest rate. Remuneratory interest may not be negative.
Early repayment: The borrower may at any time reimburse in full or in part in advance. A prior communication of no more than one month may be agreed upon. The commission must be agreed and has the following term limits and percentage that cannot be exceeded:
- Variable interest loans: The total or partial early repayment commission during the first 5 years of the loan may not exceed the amount of the financial loss that the lender may suffer, with a limit of 0.15% of the capital repaid in advance; if agreed for only the first 3 years, the limit is 0.25%. 2.
- Fixed interest loans: The total or partial early repayment commission during the first 10 years of the loan may not exceed the amount of the financial loss that the lender may suffer, with a limit of 2% of the capital repaid in advance; from year 10 the limit is 1.5%.
Interest on late payments: It shall be the remuneratory interest plus 3 percentage points and may only be accrued on the principal due and payable and may not be capitalised.
Early maturity: The borrower must be in arrears in the payment of principal or interest and the instalments amount due and unpaid must be at least equal to:
- 3% of the amount of the capital granted, if the defaulting occurs within the first half of the loan term. This requirement is deemed to be met when unpaid instalments are equivalent to the non-payment of 12 monthly instalments or a number of instalments with a term of at least 12 months.
- 7% of the amount of the capital granted, if the defaulting occurs within the second half of the loan term. This requirement is deemed to be met when unpaid instalments are equivalent to the non-payment of 15 monthly instalments or a number of instalments with a term of at least 15 months.
The lender will require the borrower to repay the loan by giving the borrower at least one month to repay the loan, warning the borrower that if they fail to repay the loan, the lender will claim full repayment of the loan.
Execution of the public instrument
Before the signature, the notary will consult the Land Survey and the Land Register, to confirm that no type of encumbrance or limitation has arisen, and inform about it.
This is the final opportunity to clarify any doubts that you may have, as once the public instrument has been signed, there is no turning back
Who signs: The legal representative(s) of the bank as lender and the recipient(s) of the loan as borrower(s); that will normally be the owner(s) of the mortgaged property. Although it is also possible for a person to receive the loan and for another to provide a property as security, known as a mortgage guarantor; this is because he/she gives his/her property in guarantee of repayment of the loan by the borrower and mortgage because it constitutes mortgage on his/ her estate, which may be lost if the borrower does not return the loan.
Deposit: The bank may on occasion demand that in addition to the property, the loan be guaranteed by another person, other than the borrower. Particular care must be taken here, since if the borrower does not pay, the bank can call on the guarantor to repay the amount of the pending loan in one single payment, without even being required to demonstrate that the debtor has no assets capable of covering the debt.
Documents to be retained: It is advisable for the customer to retain the uncertified copy of the public mortgage loan instruments signed before the notary, in addition to subsequent payment instalment documents, in order to check that the terms comply with those agreed. The notary shall deliver or send the borrower a simple free copy through telematic means and the Land Registry shall provide a Land Registry report, also via telematic means, of the registration and of the note of confirmation and qualification, indicating, if appropriate, the unregistered clauses and the reason for suspension or refusal. For this purpose, the borrower's e-mail address shall be stated in the public instrument.
Registration of the loan. In order for the mortgage to take effect against third parties, it has to be registered with the Land Registry. To this end, immediately after signature the notary will send an authorised notarial digital copy to the Land Registry online, with the status of a public instrument and the same value as the paper copy.
How to repay the loan
1. Total term: Number of years over which the loan is to be repaid. The longer the term, the greater the interest paid, and therefore the more that is paid overall.
2. Frequency of instalments: This is typically monthly in almost all cases.
3. Amount of the instalments: This is essential in order to ascertain whether you will be able to meet the loan repayments.
- If the interest rate is fixed throughout the duration of the loan: the instalments will be the same throughout the loan. Fixed interest loans have the advantage that you will know from the outset the exact amount that you will pay each month and the total paid by the end of the loan, although typically with this type of loan the interest rate is higher than a variable rate.
- If the interest is variable: again, there is typically a fixed interest period and a second variable interest period for the same time. During this second period a reference interest rate is established (Euribor, Public Debt, IRPH, etc.), to which a certain percentage margin is added. This calculates the instalment to be paid. For each adjustment period (whether a year, six months or a quarter), this interest rate agreed is once again applied, with any increase or decrease since the previous occasion, adding the margin to calculate the new instalment for the following period.
In any case, if the interest is variable, you should ask the financial institution for a repayment table each time there is a change in the interest rate, so that you can see each month what you are paying back in principal and interest and the amount left to pay. If the interest is fixed, the same table will apply for the whole term of the loan unless you make partial repayments. In this case you must ask for a new repayment table.
4. Possibility of early repayment: It is possible to advance amounts of the loan, to reduce the sum outstanding or to repay it in full, prior to the agreed end date. Each bank establishes its own conditions for this option.
Other obligations of the borrower
In addition to paying the instalments, the debtor is subject to certain additional obligations which likewise must be fulfilled. Insurance must be arranged on the mortgaged property, typically to cover damage and fire, although banks and savings banks sometimes also require life insurance at least during the first year of the loan. The obligation is, of course, to make payment of the first yearly insurance premium although it can always be cancelled and must return the excess paid for the part of the year not fulfilled..
The owner must also remain up-to-date with IBI (Municipal Property Tax) payments, the expenses charged by the property owners' association and, where applicable, any other taxes that might apply to the property, such as urban development taxes.
Loan novation and subrogation
It is possible to negotiate an interest rate reduction with the financial institution or, if this is not possible, to transfer the loan to another bank that offers better terms.
Novation of mortgage loan: It consists of an agreement with the financial institution to increase or reduce the capital, modify the agreed period of duration, the terms of the interest rate initially agreed or in force, the repayment method or system and any other of the loan’s financial terms. It is also possible to agree on the provision or modification of personal guarantees.
Subrogation of the mortgage loan: The procedure essentially comprises contacting a bank offering better terms for the loan that the terms currently in place, which will then need to issue a binding offer. This offer must set out the new terms offered, and the new bank cannot then charge any fees or expenses not agreed in this offer.
Novation of the applicable interest rate or subrogation of a third party in the rights of the creditor: Provided that in both cases a fixed interest rate is applied during the rest of the loan to replace a variable interest rate, the commission for early repayment may not exceed the financial loss that the lender may suffer, with a limit of 0.15 per cent of the capital repaid early during the first 3 years of the loan; no commission may be demanded after this period.
This is performed after the loan, as the final step once the loan has been settled. Once the loan is repaid in full, the mortgage, which is the guarantee that the loan will be paid, no longer has any meaning and is ineffective, although a formal certificate is necessary to record this termination in the Registry, which is called cancellation.
A notarial public instrument must therefore be executed for the cancellation of the mortgage, the expenses being covered by the debtor, in other words, the party that applied for the loan or subrogated it. It The debtor does not need to take part in the execution of this instrument, as it is performed by the representatives of the bank , by stating that the debtor has repaid the capital of the loan with all interests and expenses, requesting that the Land Registrar cancels the mortgage. Once it has been signed before a notary, the instrument of mortgage cancellation is presented at the Registry, where it is then registered, leaving the property completely “free” of the mortgage. Mortgage cancellations are tax exempt.
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