Mortgage Financing Services
THE 2019 LAW ON SECURED CREDIT CONTRACTS
In addition to the protection offered by the legislation on general conditions and consumption, the new Law on Real Estate Credit Agreements of 2019 sets new transparency rules for the credit agreements, the legal regime of lenders and intermediaries of real estate credit, and the rules of conduct applicable to persons involved in the marketing of mortgage-backed loans.
The Law on Real Estate Credit Contracts applies to mortgage-backed loan contracts granted by both natural and legal persons carrying out such activity in a professional manner, when the borrower, guarantor or surety is a natural person and such contract is for the purpose of granting loans secured by a mortgage or other real property right on a property for residential use including such items as storage rooms, garages, and any others that perform a domestic function, or whose purpose is to acquire or retain ownership of property built or to be built, provided that the borrower, guarantor or surety is a consumer.
Its provisions are mandatory, therefore any acts carried out in fraud of the provisions of the law are null and void.
Form and content of the credit agreement.- The contract must be concluded on paper or on another durable instrument. If the credit agreement is secured by a mortgage on a residential property located in Spain, it must be executed in a public deed and may be in electronic form in accordance with notarial legislation. The notary can only authorize the public deed if the previous Notarial Act has been granted, and must also insert in its text an identifying summary of the granted act. The registrars cannot register the deed either if the identification review is missing.
Obligations of the lender.-A series of information and publicity obligations must be fulfilled by lenders within the scope of the Law on Real Estate Credit Agreements for the granting of mortgage-backed loans or credits. These requirements are divided according to the point in time at which such information is provided. On the other hand, there is an obligation to evaluate the solvency of the borrower.
Advertising on mortgage-backed loans contracts.- Advertising on loan contracts that refers to the interest rate or any other cost related to the loan should specify in a clear, concise and prominent manner:
- The lender’s identity.
- If this is the case, that the loan is secured by a mortgage or other security interest in residential real estate or a right in real estate.
- Debit or negative balance interest rate – fixed, variable or a combination of both – indicating the charges included in the total cost of the loan to the borrower.
- Total amount of the loan.
- The annual percentage rate of charge (APR). The rate will be included in advertising at least as prominently as any interest rate, including the spread.
- Where applicable:
- the duration of the loan contract,
- the amount of the instalments,
- the total amount owed by the borrower,
- the number of instalments,
- a warning that possible exchange rate fluctuations could affect the amount owed by the borrower.
- The repayment system and the formula for calculating the principal and interest repayments are sufficiently detailed to enable the borrower to clearly verify the correctness of the amounts collected.
- Where appropriate, the debtor’s option to be able to pay the mortgaged property as a guarantee for the loan, in full discharge of the debt arising from the loan.
Pre-contractual information.- Lenders or intermediaries must offer the borrower the personalised information he needs and, in any case, have always available clear and understandable general information on credit agreements. This information must be specific:
- the identity and address of the issuer of the information,
- the purposes for which the credit can be used,
- the forms of guarantee, where appropriate, including the possibility of its location in another Member State,
- the possible duration of credit agreements,
- the forms of borrowing rate available, indicating whether it is fixed or variable or a combination of both, with a brief description of the characteristics of the fixed and variable rates, including their implications for the borrower,
- where foreign currency loans can be contracted, an indication of this, explaining the implications for the borrower of the denomination of a foreign currency loan,
- an example representative of the total amount of credit, the total cost of the credit to the borrower, the total amount owed by the borrower and the APR
- an indication of any other costs, not included in the total cost of the credit, to the borrower which are to be paid in connection with a credit agreement,
- the range of different options available for repaying the credit to the lender – including the number, frequency, and amount of repayments,
- where appropriate, a clear and concise statement that failure to comply with the terms and conditions of the credit agreement does not guarantee repayment of the full amount of credit under the credit agreement,
- a description of the conditions causally related to the early repayment,
- an indication of whether the property needs to be assessed and, if so, who is responsible for ensuring that the assessment is carried out, and whether any associated costs are incurred by the borrower,
- an indication of the ancillary services which the borrower is obliged to contract in order to obtain the credit or to obtain it on the terms and conditions offered and, where appropriate, a clarification that the ancillary services may be contracted with a supplier other than the creditor,
- a general warning about the possible consequences of failing to meet the commitments associated with the credit agreement,
- where applicable, the debtor’s option to be able to pay the mortgaged property as security for the loan, in full discharge of the debt arising therefrom, and
- any other warning established by the head of the Ministry of Economy.
Information during the term of the contract.- Lenders have periodic reporting obligations that they must fulfil at each interest or fee settlement they make for their services. In these settlements they must express themselves:
- the nominal interest rate applied in the period already accrued and, where appropriate, the rate to be applied in the period starting,
- the fees applied in the period to which the settlement relates, with a specific indication of their concept, basis, and accrual period,
- any other expenses included in the settlement, and
- as much background information as necessary to enable the borrower to check the settlement made and to calculate the associated costs.
In addition, during the month of January each year, a communication must be sent to the borrowers containing information on the fees and expenses accrued, and the interest rates applied and charged during the previous year. Finally, when the interest rate applicable to the loan is modified, the lender must inform the borrower at least fifteen calendar days before this modification is applied.
Solvency evaluation .- Another of the obligations imposed on lenders by the Law on Real Estate Credit Contracts is to evaluate the solvency of the individual who intends to be part of the loan contract. The aim is to verify the customer’s ability to meet the obligations arising from the loan.
Thus, the lender can only grant the loan if the result of the credit assessment indicates that the obligations under the loan contract are likely to be met. For this purpose, lenders must have internal procedures specifically developed to carry out this assessment. These procedures, the cost of which cannot in any case be passed on to the potential borrower, must be periodically reviewed by the lenders themselves.
In any event, an incorrect assessment of creditworthiness does not give the lender the power to terminate, rescind or amend the loan agreement at a later date, unless the borrower has concealed or falsified information about his creditworthiness or the information provided is incomplete.
The rules of transparency contained in the Real Estate Credit Agreement Act relate to marketing and to appearing before the notary.
Marketing: informative documentation.- The lender must provide the borrower with the following information at least ten days before the contract is signed:
- European Standardised Information Sheet (FEIN), from the Law on Real Estate Credit Contracts Annex I.
- Standardized Warning Sheet (FiAE) in which the most relevant clauses of the contract must be informed.
- In the case of a variable-rate loan, a separate document with special reference to the periodic payments to be made by the borrower under different interest rate scenarios.
- A copy of the draft contract, the content of which must comply with the content of the documents referred to in the previous points and include, in a detailed manner, all the costs associated with the signing of the contract.
- Clear and truthful information of the expenses that correspond to the lender and those that correspond to the borrower.
- When the lender requires insurance, it must provide the borrower with the terms of the insurance guarantees in writing.
- When the loan is to be granted in deed, the warning of the obligation to receive advice from the notary
Appearance before the notary.-
The notary must verify and check that the borrower has received the pre-contractual documentation from the lender. The borrower must appear before the notary for the purpose of obtaining face-to-face advice regarding the loan to be formalized. Once the borrower has received the necessary advice, the notary must draw up a Notarial Act, which must be referred to in the loan deed, in which it is recorded:
- that the pre-contractual information has been made available to the borrower within the legally prescribed time limits,
- the issues raised by the borrower and the advice given by the notary.
- that the notary has provided advice on the specific clauses contained in the European Standardised Information Sheet (FEIN) and the Standardised Warning Sheet (FiAE).
Finally, and in the presence of the notary, the borrower must respond to a test that aims to specify the documentation delivered and the information provided.
If compliance with the above obligations in relation to the information documentation is not accredited or if the borrower does not appear to receive the advice, the notary will express this circumstance in the minutes and the public loan deed cannot be authorised.
Linked and combined sales.- As a rule, the tied sale of loans is prohibited, contracts linked to the loan that are detrimental to the borrower and clauses in the loan contract affecting tied products, but not the loan itself, are void.
As an exception to the prohibition of tied sales practices, lenders are allowed to require the subscription of an insurance policy as a guarantee of the fulfilment of the loan, as well as the subscription of damage insurance and the other insurances provided by the mortgage market regulations.
In this case the lender must accept alternative policies from all those suppliers that offer conditions and a level of benefits equivalent to what the lender would have proposed, both at the initial subscription and at each renewal.
Appraisal of the goods given in guarantee.- The appraiser must use reliable and internationally recognized appraisal standards. The appraisal can be certified by:
- by an appraisal company,
- by the appraisal service of a credit institution, or
- by professionals independent of the lender who are approved.
Early repayment and applicable fees.- The borrower may at any time repay in advance all or part of the sums due to the lender under the loan, subject to a period of notice to be agreed by the parties to the contract which may not exceed one month .
When the borrower indicates his or her willingness to repay all or part of the loan early, the lender must provide the borrower, within three working days, with the information needed to evaluate this option.
At the very least, the lender must quantify the consequences for the borrower of the full or partial settlement of its obligations, clearly setting out the assumptions made in drawing it up, which must be reasonable and justifiable.
An early redemption fee or compensation can only be charged if expressly agreed upon and within the following limits:
- In variable interest rate contracts or contracts with variable tranches, a fee may be agreed to compensate the lender’s financial loss for one of the following cases, which are mutually exclusive and cannot be exceeded
– 0.15 per cent of the capital outstanding during the first five years of the contract, or
– 0.25 per cent of the capital outstanding during the first three years of the contract.
- In cases of novation of the interest rate or subrogation of a third party in the rights of the creditor, provided that in both cases this entails the application of a fixed interest rate from now on and for the rest of the term of the contract, in substitution of a variable one, a fee may only be agreed to compensate the financial loss of the lender during the first three years of the term of the contract and may not exceed 0.15 per cent of the outstanding capital.
After the first three years of the contract, no compensation can be demanded on the occasion of the novation of the interest rate or subrogation to a third party.
- In fixed-rate or fixed-tranche contracts, a fee may be agreed to compensate the lender for the financial loss it cannot exceed:
– two per cent of the capital outstanding during the first ten years of the contract – or from the date on which the fixed rate applies, or
– 1.5 per cent of the outstanding capital from the tenth year of the contract.
While in variable-rate loans or loans with variable tranches a choice between one of the two legal options is required, in fixed-rate loans the applicable percentages follow one another over time, allowing the entire life of the loan to be covered.
Early maturity of the credit in the event of non-payment .- In view of the constant problems regarding the foreclosure of loans with early maturity clauses, the Real Estate Contracts Law opts to expressly regulate when a default must be understood to be sufficiently significant to trigger the early maturity of the loan.
Thus, it is established that in loans or credits whose borrower, guarantor or guarantor is a natural person and are secured by a security right over residential real estate or whose purpose is the acquisition or conservation of real estate for residential use, the borrower will lose the benefit of the term and the early maturity will occur whenever the borrower is in default in the payment of a part of the capital or interest, that the lender has issued an injunction giving it at least one month to comply, with a warning that failure to comply will result in the full repayment of the loan due, and that the amount of the instalments due and unpaid is at least equal:
- three per cent of the capital loaned, if the default occurs within the first half of the term of the contract, this requirement being understood to be fulfilled when the instalments due and not paid are equivalent to the non-payment of twelve monthly instalments or a number of instalments equivalent to twelve months, or
- seven percent of the capital loaned, if it is in the second half of the term, this requirement being understood to be met when the instalments due and not paid are equivalent to fifteen monthly instalments, or a number of instalments equivalent to fifteen months.
Interest on arrears.- Interest on arrears on loans or credits concluded by a natural person which are secured by a mortgage on immovable property for residential use is interest on arrears, i.e. the interest paid by the borrower on the capital loaned, plus three percentage points over the period in which it falls due.
Interest on arrears can only be accrued on the principal that is due and payable and cannot be capitalised, except in the event that, in the context of a foreclosure proceeding on a habitual residence that has been mortgaged, the foreclosed party cannot satisfy the percentages of principal outstanding plus legal interest.
A mortgage loan or simply a mortgage is used either by real estate buyers to obtain funds to purchase a property, or by a property owner who needs to obtain financing through a loan, for which it is sometimes necessary to offer a property as security for the repayment of the borrowed money. The loan is “guaranteed” on the property of the borrower through the granting of the Mortgage Deed before a Notary Public and subsequent registration, with constitutive effect, in the Property Registry. This means that a legal mechanism is established that allows the lender, in the event that the borrower does not return the loan or fails to comply with any of its essential conditions, not to take possession, but to urge the competent court to sell the mortgaged property by means of a public auction, and with the money obtained in said auction the lender will be paid.
The amount you can obtain through the mortgage loan will depend on the official appraisal or the purchase price of the property, whichever is lower. The maximum Value to Loan is usually 70% if you pay taxes outside Spain, or 80% if you are a resident in Spain, for the purchase of your main residence.
The mortgage is a real right of realization of value with function of guarantee, that falls on real estate. The property on which it falls, regardless of its holder, is subject to direct and immediate execution of the secured obligation. For its constitution, it is not necessary a possessory displacement, but the inscription of the right in the Property Registry.
It is a real right of value realization, since it attributes to the holder of the right of mortgage a direct, immediate and exercisable power against all, on the mortgaged property, and allows him, in case of default by the debtor of the guaranteed obligation, to sell by means of public auction the mortgaged property to obtain the collection of his credit.
The economic function of the mortgage contract is to guarantee the insured credit, by means of the right attributed to its holder to sell by means of public auction the property on which it falls in the event of non-compliance with the guaranteed obligation. This guarantee function is reinforced by the non-depreciable nature of the assets on which it falls, the preferential nature of the mortgage credit for its satisfaction, and the enforceability of the procedure for its execution.
Accessory character of the mortgage. – The mortgage was created to guarantee an obligation and does not exist independently of it; therefore, it is accessory to the credit it guarantees. This relationship of accessory nature, which translates into the subordination of the mortgage to the guaranteed credit, is manifested in
(a) The mortgage is constituted simultaneously with the guaranteed credit; it cannot be done before it. However, there are exceptions to this principle, such as the mortgage guaranteeing a future obligation, the obligation mortgage subject to a suspensive condition and the floating mortgage.
(b) The mortgage is transferred with the credit; it cannot be transferred separately and it cannot guarantee a different credit.
(c) The mortgage loan’s accrual affects the mortgage: the nullity of the guaranteed loan means the nullity of the mortgage, the extinction of the obligation determines the extinction of the mortgage, without the mortgage being able to survive it.
Principle of speciality or determination. – The principle of speciality or determination in the field of mortgages requires that the mortgage deed clearly states the property subject to the mortgage, the parties involved, the obligation guaranteed by the mortgage and the amount for which the property is liable regardless of the obligation, or mortgage liability.
Indivisibility of the mortgage guarantee. – As long as it is not cancelled, the mortgage subsists on the integrity of the mortgaged property, on any part of it, and in the event that it falls on several assets, on the totality of the mortgaged assets, even if these are divided or the credit is partially paid.
If the mortgaged property is unique, it is not permitted to release a part of the mortgaged property, and if there are several mortgaged properties, as long as the guaranteed credit is not fully paid, none of them can be released for a partial payment.
The principle of indivisibility can be waived by the creditor. If the credit has been distributed among several properties, and any of them passes to a third holder, the latter can demand the cancellation of the mortgage that taxes the property, satisfying the special responsibility of the one that responds and, if it is the case, the interests.
Mortgage liability: The mortgage does not exclude the debtor’s unlimited personal liability for the guaranteed obligation, but rather adds to it, reinforcing it by affecting the fulfilment of the obligation with a certain asset.
The exception to this principle is a mortgage with a liability provision. In this, the parties agree that the guaranteed obligation, in the case of public auction, may only affect the mortgaged assets, so that the liability of the debtor and the creditor’s mortgage action is limited to the value of the mortgaged assets and does not extend to the other assets of the debtor’s estate.
Constitution of the mortgage
The real estate mortgage is constituted by the will of the parties by means of a bilateral legal transaction, that is to say, by means of a contract between the parties that creates the mortgage guarantee.
A real estate mortgage requires a cause, which is to guarantee the payment of an obligation. The cause of the mortgage contract must be present throughout the life of the mortgage and is the origin of the principle of accessory right to the guaranteed obligation. It is presumed that the cause exists and is lawful, even if it is not expressed in the contract.
As for the form of constitution of the mortgage, it is done through a public deed and subsequent registration in the Land Registry. These requirements have a constitutive character, so that without the inscription in the Registry of the Property the right of mortgage is not constituted.
Registration of the mortgage. – In the registration of the mortgage, the amount of the principal of the debt, the amount of the agreed interest, the maximum amount of the guaranteed liability, the guaranteed obligation its duration, and, if they have obtained the favourable registry qualification, the financial clauses, including the one of early maturity, must be stated,
For foreclosure, the cause determining the early maturity of the financing contract must be recorded in the Land Registry. This does not prevent the unregistered cause of early maturity from being asserted against the debtor in the corresponding declaratory judgment.
It is possible to partially register the mortgage in the Land Registry, that is to say, not to register any of the agreements included in the presented deed, upon request of the interested party. However, even if there is a request for partial registration, the registrar must suspend the registration of the document when the unregistered clauses affect the total context agreed by the parties.
The refusal to register a clause determines that it cannot be enforced against third parties, without prejudice to its validity and full effectiveness between the parties.
The Intervening Parties
In the constitution of the mortgage, the Mortgage Grantor, holder of the real right of the mortgage, the person in guarantee of whose credit and in whose favour the mortgage is constituted, and the Mortgage Debtor, is the obligor in the personal legal relationship guaranteed with the mortgage, and, normally it is also the Mortgagor, who constitutes a mortgage in favour of the creditor, but it can also be a non-debtor, who constitutes a mortgage on his assets as a guarantee of the debt of another person. A Third Party Holder, who is the acquirer of the mortgaged property, who is not personally subject to the performance of the secured obligation, nor was he a party to the act of constitution of the mortgage, may apply. The third holder has a special procedural status in foreclosure proceedings.
In order to constitute a mortgage it is essential to be the owner of the property and to have the free disposition of this, or to be legally authorized to do so, since the constitution of the mortgage implies an act of disposition.
The Mortgage Lender. – The mortgagee must have general capacity to contract. If he lacks it, he must act through his legal representatives. The mortgage creditor may be the person who in turn is the guarantor of the main obligation, so that the guaranteed credit is the eventual credit that may arise from the guarantor against the debtor as a result of the payments made by the latter to the creditor.
In the case of a foreign mortgagee, the capacity is that of its national law. Such capacity must be accredited by means of an affirmation or report from a Spanish notary or consul or from a diplomat, consul or competent official of the country of the applicable law (such as the foreign notary, the authority of the foreign official being generally legitimated by means of the apostille provided for in the Hague Convention).
The condition of Credit Entity of the mortgagee determines certain specialties in the regulation of the mortgage, with a more favorable regime if the mortgagee is a credit entity than if it is not. If the mortgagee is a credit institution, a different regime of transparency and consumer protection applies, as well as a special and exclusive regime of tax and tariff benefits for subrogation and novation, and a regime of registration or transcription in the Property Registry of financial or early maturity clauses. In addition, they can formalize the reverse mortgage.
The Mortgage Broker
The relevant moment to assess the capacity to mortgage is the moment of granting of the mortgage loan deed, since at that moment the consent is given, and not the moment of registration of the mortgage in the Land Registry. In the event that there are several mortgage holders, several owners of the same property, the capacity to dispose is required of each and every one of them, so that if one of the grantors lacks the capacity to do so, the indivisibility of the mortgage right means the nullity of the entire contract.
Capital companies. – In capital companies, it is the competence of the general meeting to deliberate and agree on the acquisition, disposal or contribution to another company of essential assets – the essential nature of the asset being assumed when the amount of the transaction exceeds 25% of the value of the assets appearing on the last approved balance sheet. Therefore, transactions involving the creation of a mortgage on essential assets of the company on these terms must be submitted to the general meeting of shareholders for approval.
Minors and the disabled. – In the case of minors subject to parental authority, the consent of the parent with parental authority is required, or in the absence of such consent, judicial authorisation. For minors over 16 years of age, their consent is also required. The same requirements apply to minors under guardianship, with the consent of the parent with custody being replaced by the consent of the guardian. In the case of an emancipated minor, the consent of his or her parents or guardian is required to complete his or her capacity to act. In the case of a person under guardianship, the consent of the guardian is required. In the case of a married minor, the consent of the other spouse is sufficient if he/she is of legal age. Otherwise, the consent of both parents is required. In the case of an incapacitated person, it depends on the provisions of the incapacity judgment.
Voluntary representation. – The express and specific power of attorney is required that it expressly includes the power to mortgage, since the constitution of a mortgage is an act of ownership. This power of attorney must be set out in a public deed, and must be interpreted strictly, so that it cannot be extended to cases other than those provided for in the text of the deed.
Special situations. – In the case of a mortgage on community property, the consent of both spouses is required (or by one of them with the consent – even tacit – of the other) and, failing that, judicial authorisation. In the case of assets presumed to be community property, it is also required that the act be granted by the spouse who is the owner of the register.
In the case of a family’s habitual residence, the consent of both spouses is required, or if appropriate, judicial authorisation, even if the property belongs to only one of the spouses.
In the case of community property, the agreement of all the community members is necessary to encumber the entire property with a single mortgage. If it is intended to encumber one of the instalments individually, the consent of the respective owner is sufficient.
Mortgaged assets and rights
The real estate that can be registered, and the rights in rem that fall upon them, can be subject to a mortgage. The requirements that allow a property or right to be mortgaged are
(a) As the mortgage is a right of constitution in the registry, it can only be granted to goods or rights that can be registered. Likewise, it may fall on other registrable rights that are not considered to be real rights, for example, rental rights.
(b) Properties that are prohibited from being disposed of are not susceptible to mortgage unless the maturity of the guaranteed obligation is later than the end of the period of the prohibition to dispose of.
(c) The owner’s mortgage, in which the mortgagee and the owner of the property given as a guarantee coincide in the same person, is not accepted.
(d) Nor is a future mortgage on property not yet in existence, or on property not owned by the mortgagor at the time of incorporation, acceptable.
Transfer of the property
The mortgage does not limit the powers of disposal that the mortgagor has over the mortgaged property. He can sell it, donate it, or re-mortgage it. The transfer of the mortgaged property, as well as its encumbrance or embargo, cannot be registered as a cause of early maturity of the mortgage credit, because it does not have a preferential rank in front of the mortgage, it is contrary to the freedom of contracting, and to the promotion of territorial credit.
With assumption of debt by the purchaser with the consent of the mortgagee – The purchase and sale of a mortgaged property with assumption of debt by the purchaser with the consent of the mortgagee releases the seller and mortgagee from the mortgage debt. Therefore, the purchaser becomes the mortgage debtor and as such is responsible for the debt, not only with the acquired property, but with all its present and future assets, while the seller and original mortgage debtor is completely dissociated from the original relationship.
If the consent of the mortgagee to the assumption of the debt by the purchaser has not been requested or obtained, the seller remains the mortgagee and is obliged to pay to the mortgagee, even if the property has been transferred to the purchaser.
The consent of the mortgagee may be given expressly or tacitly through conclusive acts of the mortgagee.
Purchase and sale of mortgaged property without assumption of debt by the purchaser – In the event that in the purchase and sale of mortgaged property there is no assumption of debt by the purchaser because it has not been agreed, the latter assumes the position of third party holder and not of debtor. The consequences are different, depending on whether or not the purchaser has retained the amount of the outstanding mortgage debt.
In the event of retention or deduction from the price of the amount of the debt, if the seller and mortgagor have had to pay the debt, it is subrogated to the right of the mortgagee until the purchaser pays the full amount of the debt. There is a clear subrogation in the mortgage, although in this case the guaranteed right is the right to the reimbursement of the amount paid by the seller and mortgagor to the mortgagee. The mortgage, which previously served as a guarantee of the mortgagee’s credit, now serves as a guarantee of the purchaser’s right to repayment in favour of the seller and mortgagor, if the seller has finally had to pay the mortgage loan whose outstanding amount was withheld.
If the purchaser has not deducted or withheld the amount of the debt from the purchase price, he does not become a mortgagee, but the property he owns is liable for the debt of the third party.
Devaluation of the property.
The fundamental actions available to the creditor in relation to the property subject to the mortgage during the phase prior to execution are aimed at preserving it, preventing its guarantee from being reduced or disappearing.
Devastation action: This is a legal action that seeks to avoid the loss of value or deterioration of the mortgaged property due to the owner’s fault. The creditor may, if he has a well-founded fear that such a decrease or deterioration could mean that the mortgage guarantee is insufficient, request the judge of the place where the property is located to order the owner to do what is necessary to avoid or remedy the damage.
The judge may order the early maturity of the debt, the judicial administration of the property, or order the extension of the mortgage to other assets of the debtor.
There is an impairment – iuris tantum presumption – when the mortgaged property is rented out after the mortgage for an income which, capitalised at 6% per annum, does not cover the amount of total insured liability. The procedure for the exercise of this action is that of verbal judgment.
The extension of the mortgage is permitted when the value of the initial appraisal of the property decreases by more than 20%, and with this certain ratios of the value of the loan to the value of the guarantee are exceeded, depending on the outstanding principal. In this case, the lending institution, after an appraisal by an independent approved company, may require the mortgagor to extend the mortgage to other assets sufficient to cover the required ratio between the value of the property and the loan or credit it guarantees. If the debtor is an individual, the demerit referred to must have been maintained for a period of one year.
Early maturity of the credit – In real estate practice, the creditor has the possibility of declaring the credit to be overdue in advance, without the need for the exercise of the devastation action in the event of a decrease in the value of the guarantee due to the debtor’s own acts, and the total disappearance of the guarantee due to a fortuitous event.
Usually other causes for early maturity are agreed due to the impairment of the guarantee, such as, for example, non-payment of insurance premiums, non-payment of property taxes or community charges that have a preferential status over the mortgage, the existence of prior and preferential charges to the mortgage itself that are not known at the time of the constitution of the mortgage, or failure to comply with the obligation to make repairs and maintenance in the mortgaged property.
The Obligation guaranteed with the Mortgage
The guaranteed obligation must have an economic content, either directly, as is the case with economic obligations, or indirectly in the case of non-pecuniary obligations, in which case the liability deriving from failure to comply with the obligation is that which is insured by the mortgage.
Regarding the guaranteed obligation, the principle of determination or speciality requires that it be defined in the Land Registry as regards the parties involved, the content of the obligation, and the maximum liability of the mortgaged property.
The registration of the guaranteed obligation must include both the principal amount of the debt plus interest or the maximum amount of the mortgage liability, identifying the guaranteed obligations, whatever their nature and duration, and the early maturity and financial clauses of the obligations guaranteed by mortgage in favour of the credit institutions. Without prejudice to the foregoing, the registrar is responsible for carrying out his or her function of assessing the legality of these clauses for registration in the Land Registry.
Assignment of mortgage credit.- The assignment of the mortgage claim is the operation by which the creditor (assignor) transfers to a third party (assignee) the claim, with its accessories, which it holds against the debtor (assigned), while the same obligation remains in force.
The assignment of the credit guaranteed by the mortgage entails the assignment of the mortgage itself that guarantees it. Although the parties may agree to the assignment of the credit and not of the mortgage guarantee, without this entailing the extinction of the mortgage, it is not possible to assign the mortgage without the credit it guarantees.
The assignment of the mortgage credit may be partial, giving rise to a mortgage obligation with several subjects on the active side of the obligation.
For the valid assignment of the mortgage credit, a public deed is required because it is a necessary requirement for registration and because this provides certainty of the date of the assignment. Although the inscription in the Property Registry has the character of the mortgage, it does not have it for the cession of the guaranteed credit. The assignment produces effects between the assignor and the assignee, even if the assignment has not been registered in the Land Registry so that the ownership of the receivable with all its accessories, including the mortgage, is transferred to the assignee. However, registration does determine the effectiveness of the assignment against third parties.
Notification of the debtor is not a necessary requirement for the validity of the assignment, nor is it necessarily a prerequisite to registration, allowing registration of the agreement by which the debtor waives the right to be notified of the assignment of the receivable.
Mortgage loan modification
Modifying novation of contracts by agreement of the parties is permitted, among other things, by modifying their content. This means, in principle, that the variation of the conditions of the loan contract does not determine its extinction and its replacement by a new one, but the simple modification of the original contract. In the mortgage field this is of great relevance if we consider that, by virtue of the principle of the accessory nature of the mortgage to the secured obligation, the extinction of the secured obligation would determine the extinction of the mortgage, and therefore the loss of rank of the second credit (the modified credit) compared to the rank that the original credit had in benefit of the subsequent creditors, and the need to constitute a new mortgage which would also require additional expenses derived from this new constitution. In any case, none of these modifications could prejudice third parties who had acquired and registered their right prior to the registration of the modification (i.e. third party holders, subsequent mortgage creditors, etc.), in which case they would have to give their consent.
The extinction of the secured obligation by a new one takes place if the parties expressly agree, or if the old and new ones are completely incompatible. The question therefore is to determine when the modification is of such importance that it is understood that what has been agreed upon is a new credit and not a simple novation modifying the previous loan.
The increase or reduction of capital, the alteration of the term, the conditions of the interest rate initially agreed or in force, the method or system of repayment and any other financial conditions of the loan, or the provision or modification of personal guarantees are not extinctive modifications of the initial loan.
Similarly, the creation of tranches, even with different maturity or interest rate conditions, does not constitute an extinctive modification of the mandatory relationship, but merely a modification. In this sense, the splitting of the guaranteed obligation into different tranches implies a modification of the mortgage loan, but does not imply the splitting of the single obligation, nor does it imply the splitting of the mortgage.
Likewise, the extension of the term is admitted as a modifying novation that is not extinctive, even in the case that said extension is agreed after the expiry of the initial term. The above modifications will not, in any case, imply an alteration or loss of the range of the registered mortgage, except when they imply an increase in the mortgage liability figure or the extension of the loan term due to this increase or extension. In these cases, acceptance by the holders of rights registered with a subsequent rank will be required, in accordance with current mortgage regulations, in order to maintain the rank. In both cases, they will be recorded in the Register by means of a note in the margin of the mortgage subject to modification novation. Under no circumstances will it be possible to do so when there is a registered request for information on the amount pending execution of subsequent charges.
Mortgage loan extension.- In cases in which there is an increase in the capital of the mortgage loan, due to an increase in the mortgage liability figure or the extension of the loan term due to this increase or extension, and there are subsequent record holders who do not accept the novation, it must be understood that the extended amount of the loan is insured with a new mortgage, with the corresponding mortgage range, while maintaining the range of the original mortgage with respect to the original loan amount without considering the extension.
Maturity of the guaranteed loan
The maturity of the credit guaranteed by the mortgage may be determined by the expiry of the agreed term, or by the concurrence of certain causes agreed by the parties to the contract that produce the effect of making the debtor’s payment obligation enforceable.
The creditor can claim the debt in its entirety before the expiry of the term, and therefore the debtor loses the right to use the term he has for the repayment of the amounts made available by the creditor, in the event that any of the agreed and assessed events occur that endanger the repayment of the amounts lent, so that there is a certain and determined risk that the payment of the debt will not be fulfilled by the debtor on its normal expiry, thus diminishing the legitimate expectations of collection of the debt.
These clauses seek to compensate for the creditor’s loss of confidence in the debtor’s economic capacity to make payment, in order to provide legal certainty to contractual relations.
In practice, the following reasons for early repayment are usually agreed:
- Mortgaged property. This refers to both the transfer and non-consensual encumbrance of the mortgaged property, as well as the impairment or deterioration of its value.
- Payment of the obligation. The clause of early maturity of the guaranteed obligation is valid in the event of non-payment by the debtor of at least 3 instalments or a number of instalments such that the debtor has failed to fulfil his obligation for a period of at least the equivalent of 3 months, and this agreement is recorded in the deed of incorporation. This clause can be registered in the Land Registry.
- Solvency of the debtor. The clause that determines the early maturity of the obligation in the event of the debtor’s supervening lack of solvency is also frequent. The DGRN has considered it not to be registrable. The clauses that establish the power of resolution by the declaration of bankruptcy are considered not to be put in place.
Fees of the creditor entities
In the event of early repayment of the secured credit, certain limits are established for the fees to be charged by the creditor entities:
- For loans or credits made from 16-6-2019, when the LCCI came into force, only one fee or compensation for early repayment can be charged, with the following limits:
- In contracts with variable interest rates or variable tranches, a fee may be agreed to compensate the lender for a financial loss that cannot be exceeded:
– 0.15% of the capital outstanding during the first 5 years of the contract, or
– 0.25% of the capital outstanding during the first 3 years of the contract.
- In cases of novation of the interest rate or subrogation of a third party in the rights of the creditor, provided that in both cases this involves the application of a fixed interest rate from now on and for the rest of the term of the contract -in substitution of a variable one-, a commission can only be agreed to compensate the financial loss of the lender during the first 3 years of the term of the contract and cannot exceed 0.15% of the capital pending repayment.
After the first 3 years of the contract, no compensation can be demanded on the occasion of the novation of the interest rate or subrogation to a third party.
- In fixed-rate or fixed-tranche contracts, a fee may be agreed to compensate the lender for the financial loss it cannot exceed:
– 2% of the capital outstanding during the first 10 years of the contract, or from the date on which the fixed rate applies,
– 1.5% of the outstanding capital from the tenth year of the contract.
For these purposes, a financial loss is defined as the amount resulting from the negative difference between the capital outstanding at the time of early repayment and the present market value of the loan.
- Since 9-12-2007, no commission can be charged for early repayment of loans or credits formalized, nor can any commission be charged for issuing the documentation that accredits the payment of the loan.
As regards compensation for interest rate risk in the case of total or partial subrogative and non-subrogative cancellations of mortgage loans or credits, when these occur within an interest rate review period whose agreed duration is equal to or less than 12 months, the creditor entity is not entitled to receive any amount as compensation for interest rate risk. In all other cases, compensation for interest rate risk is as agreed and depends on whether cancellation results in a capital gain or loss to the entity.
In this sense, capital gain from exposure to interest rate risk is understood to be the positive difference between the capital outstanding at the time of early repayment and the market value of the loan or credit. When this difference yields a negative result, it is understood that there is a capital loss for the creditor entity.
The discount rate is the market rate applicable to the remaining term until the next review. The loan contract will specify the index or reference interest rate to be used to calculate the market value from among those determined by the Ministry of Finance.
In the event of partial cancellation, the percentage of the outstanding capital to be amortized will be applied to the result of the above formula. The creditor entity may not receive compensation for interest rate risk in the event that the cancellation of the credit or loan generates a capital gain in its favour.
The contract must specify which of the following modalities for the calculation of the interest rate risk compensation will apply:
- a fixed percentage set out in the contract, to be applied to the outstanding capital at the time of cancellation, or
- the loss, total or partial, that the cancellation generates to the entity. In this case, the contract must provide that the entity will compensate the borrower symmetrically if the cancellation generates a capital gain for the entity.
These limitations apply to mortgage loan or credit agreements, where the loan or credit is for a home and the borrower is a natural person, or where the borrower is a legal person and is subject to the corporation tax regime for small businesses.
The entity is obliged, in any case, to issue the banking documentation that accredits the payment of the loan without charging any commission for it.
Registry Range Agreements
The registry rank is the order or hierarchy of the various compatible rights in rem registered in the Land Registry that fall on the same property. It is the relative position of each registered right compared to the other registered rights. Rank is the economic materialization of the principle of priority. It gives value to the registered right. Each registered right has a rank which is determined by the date of entry in the Land Registry.
The rank may be subject to change by provision of the law, as a result of the Spanish registry system of continuous ranks, or by legal transaction between the parties.
Businesses above the range can be classified into the following three types:
Postponement. – It is about an inscribed rank versus a non-inscribed rank. A mortgagee assigns the rank of its mortgage in favor of an unincorporated mortgage that would itself have a later rank, because of its later registration.
Swap. – It has as object two ranks already registered. This is a legal transaction by which two mortgagees exchange the ranges corresponding to their respective mortgages. Both ranges exist at the time of the exchange transaction.
Reserve: It is intended for future ranges, none of which have yet been consolidated. A person reserves a certain range to be acquired, normally in the same deed of constitution of the mortgage that is postponed, for another that is planned to be acquired in the future.
The Spanish bank will usually require, at least, these documents:
- Copies of your Passport and spanish NIE
- Your last Tax declaration or P60
- Your last three payslips
- Details of other properties you own, including any rental income
- A bank statement of the last 6 month
- An Experian credit report