There can be all sorts of different reasons why you may wish to take out a mortgage when you buy a property in Spain. You may have your funds tied up in another venture and taking out a mortgage may allow you to buy now rather than later or even keep your funds working elsewhere. You may not have all the funds to buy the property outright and therefore need the mortgage to buy the property. It might allow you to buy a bigger property than you would have otherwise been able to do. You may wish to use this as an inheritance tax planning exercise. There may even be other tax advantages to taking out a mortgage.
Unfortunately, a lot of people who previously took out mortgages to buy property in Spain are now experiencing problems repaying the mortgage. This could be because they over reached themselves when they took out the mortgage. It could be because their circumstances have changed – for example, they may have lost their job, or It might be that they were relying on rental income to help pay for the mortgage which has not materialized.
Whatever the circumstances thousands of people now find that they are struggling to pay their mortgages on a month-to-month basis and as a result have found themselves in conflict with their Bank in Spain or a third-party entity who has acquired the debt from the Bank in Spain.
What are the options for dealing with a Spanish mortgage debt?
You may have various options available to you, but it is vital that you understand what those options are before starting any formal procedures with the Spanish Bank.
Banks in Spain often think in a different way and therefore it is important that you understand what their priorities are before speaking to them.
If you do not understand how Banks think, what requirements Banks have and what their priorities are then it is very easy to get yourself into even more trouble by saying or revealing something that seems innocent, but which is then later on used against you by the Spanish Bank.
Worse than saying the wrong thing however is sticking your head in the sand and hoping that the problem will go away. It won’t. If you ignore the Bank the problem will simply get worse.
By failing to deal with the issue or engage with the Bank, the Bank will simply keep adding on late payment fees and interest penalties every month, which will make the amount due even greater. If the Bank in Spain eventually end up repossessing the Spanish property, the further addition of legal fees is likely to swallow up any equity that you may have in the property.
Just assuming that the Bank will not co-operate or assuming that because your own attempts at resolving the issue have failed means that nobody else can help is a common conversation we have with clients.
Obviously, you have to be realistic about your objectives and what can be achieved when negotiating with your Spanish Bank
What is a Dación en pago?
You may have heard the term “Dación en Pago”. This essentially is a mechanism that allows you hand the property back to the Bank.
It has to be done by agreement with the Spanish Bank. The belief that you can simply “hand back your keys” is certainly not true and has in fact placed people in extremely severe positions when the Bank in Spain finally locate a borrower.
The vast majority of the Spanish Banks have signed up to a Code of Conduct in which they have agreed to always agree to a Dación en Pago if certain criteria are met by the owners of the property or the borrowers who took out the mortgage.
This system was brought in by the Spanish Government as a way of reducing the cost of repossession and providing a solution for the people who had taken out mortgages and who could no longer afford them.
If you comply with the requirements, then you can hand the property back to the Bank as full and final settlement for the mortgage debt owed.
What are the Dación en pago requirements?
In order to qualify for an automatic Dación en Pago it is necessary to comply with all the following requirements:
- A restructure of the loan to make it more affordable must have been attempted.
- The value of the property must be less than €200,000 in large cities and less than €120,000 in cities with less than 100,000 inhabitants.
- The property must be the only home that the borrower owns anywhere, not just in Spain.
- All family members of the borrower must be unemployed.
- The mortgage was taken out to buy the property and is not subject to other guarantees registered on it.
- The mortgage payments must make up more than 60% of the net family income
- There are no other assets with which to satisfy the debt
Dación en pago by negotiation
Even if you do not comply with all the requirements for a Dación en Pago, it may still be an option for you. The individual Bank can, if they wish to, agree to take the property back from you in settlement of the amount outstanding to them under the mortgage
The requirements above only set out when a Spanish Bank, that has signed up to a Voluntary Code of Conduct, has to accept a Dación en Pago. Obviously, the more requirements you meet and the greater the equity on the property the more chance that we can negotiate a Dación en Pago with your Bank in Spain.
In some cases, we have even managed to negotiate with the Bank that they will take over the cost of running the property until it is sold and then give you back any difference between the amount that you owe them, and the price realized upon a sale.
Renegotiating existing terms on a Spanish mortgage.
If you wish to retain the property and simply wish to negotiate over the terms of the mortgage, then this may be possible. Any negotiation and the final scope of the changes in your terms will be at the discretion of the Bank. Fundamentally however, the Banks in Spain would much rather re-negotiate with you over the terms of the mortgage and get to a stage where you are paying regularly rather than be in a situation where they have to re-possess.
The Banks remain probably the largest estate agents in Spain due to the large numbers of borrowers who have defaulted on their obligations in the past decades.
Some of the terms that be renegotiated include:
- Periods of time in which your mortgage is interest only
- Extending the length of the mortgage to reduce down the monthly payments
- Reducing down interest rates
- Writing off part of the amount outstanding to the bank
Naturally, factors such as the amount of arrears on the mortgage payments or the longer you have been ignoring the Bank can result in the Bank being less co-operative. It is therefore important to deal with an experienced firm of solicitors with specialist knowledge of these issues to negotiate on your behalf.
Can a Bank in Spain pursue a mortgage debt in the UK?
Many people – mistakenly- have been led to believe that because the property is in Spain, the Bank is in Spain and the mortgage debt is in Spain, that the Spanish Bank cannot come after them in the UK for the debt. This is certainly not the case.
In the majority of cases, the Bank in Spain will have a first charge on the property and are likely to attack that in the first instance. If they can sell the property through an auction process to cover the amount outstanding, then that would bring the matter to an end. However, if the value of the property is less than the amount outstanding then the Bank has a right to pursue a borrower for any shortfall.
The above scenario results in the Bank in Spain coming after any assets that borrowers may have in the UK and has in many cases resulted in “charging orders” being placed upon the property assets of borrowers in the UK due to the Enforcement of a debt Judgement obtained by a Bank in the Court in Spain.
The Banks of course always will balance whether it is worth pursuing the shortfall across borders due to foreign debt recovery being potentially problematic and expensive,
What are Floor clauses?
When you take out a variable mortgage the amount of interest that you pay on your mortgage changes according to the rate of interest that applies at the time. As the interest rate increases then the interbank rate (EURIBOR) changes. Typically, a variable mortgage will have an interest rate that is set so many points above the EURIBOR rate.
Consumers may be used to having a maximum interest rate that applies to their mortgage. This is a term in their mortgage agreement which states that the interest rate can never go above a certain percentage. This allows a certain amount of security to the consumer. This is often referred to as a Ceiling Clause (clausula techo).
What many people have not been aware of is the flip side of the Ceiling Clause. Bank(s) in Spain inserted what is known as a “Clausula Suelo”. This is a clause which means that the interest rate can never go below a certain percentage even if the EURIBOR drops significantly.
Over several years, the EURIBOR has dropped significantly and therefore these floor clauses in Spain have kicked in, meaning that the customers of the Spanish banks have had to pay a higher interest rate than they would have if these floor clauses did not exist.
A Court decision made at the Supreme Court in Spain on 9th May 2013 stated that these floor clauses were abusive and ruled that in the future they could not apply.
This meant that if a Bank applied the floor clause from that point onwards then the borrower could claim back the overpayment in interest that applied.
That Court Judgment was very specific in stating that the Judgment did not have retrospective effect— i.e., it would not oblige Banks to pay back any interest received as a result of the floor clause before that date
The Spanish Court decision was then taken to the European Court of Justice and that Court ruled on 21st December 2016 that the Judgement could apply retrospectively.
The result of the ECJ ruling entitles anyone who had a floor clause in their mortgage conditions the ability to then apply to have the difference returned to them by the Bank.
Why choose Judicare for advice about Spanish mortgage problems?
If you’re facing problems with your mortgage abroad, our specialist overseas property law team can help you explore your options, including negotiating full and final settlements or variations to the mortgage with your foreign lender, taking steps to sell or rent out the property, and considering whether taking legal action (such as a mis selling or professional negligence claim) is viable.
At Judicare, we are dedicated to providing bespoke overseas property law advice and representation to clients across the globe. Below are just some of the reasons our clients instruct us:
- Our legal teams have decades of combined experience of handling foreign mortgage issues in Spain, Cyprus, France & Portugal for UK clients.
- We are regulated by the Solicitors Regulation Authority (SRA) and as such we carry professional Indemnity Insurance giving you vital protections and redress in the unlikely scenario something goes wrong.
- Using unregulated firms providing foreign property debt solutions across the EU can be risky, as there are no safeguards or any regulatory redress for clients if something goes wrong.
- We’re members of the Association of International Property Professionals and devote ourselves to promoting principles of good practice within the international property industry.
- We have successfully negotiated over £35m of foreign Bank debt being written off for our clients.
Useful Spanish terms
Lawyer or solicitor
Agente de propiedad inmobiliario
Apartamento / piso
Comunidad de Propietarios
Community of owners / Residents Association
Compra / compraventa
Purchase / Buying and selling
Dación en Pago
Handing the keys back to the bank
Embargo / Charge
IBI (Impuesto Sobre Bienes Inmuebles)
IVA (Impuesto Valor Añadido)
VAT (Value Added Tax)
NIE (Numero de Identificación de Extranjeros)
Foreigner’s Identification Number
Land Registry Search
Permiso de obra
Power of Attorney
Póliza de seguros
Registro de propiedad
Official value of the property