How to check the legal documents before buying a property?
I'm sure you've all heard of the infamous "floor clauses" contained in Spanish mortgage contracts. However, as much as I'm sure you've heard, I'm just as sure you're not entirely clear on what they are or what they entail. This confusion, which already exists in the Spanish community and even more so abroad, is due to the enormous amount of contradictory, and sometimes directly false, information spread by the media. Although I must admit that the zigzagging course that Spanish jurisprudence has taken does not help this.
A "floor clause" is a clause in a mortgage contract that establishes a minimum for the mortgage payments, regardless of whether the ordinary interest agreed with the financial institution is below that minimum.
Most of the mortgages granted in Spain apply an interest rate that is set based on a reference rate, usually the Euribor, although there are others, plus a differential that varies depending on the financial institution in question.
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In most Spanish mortgages, the interest rate to be paid is calculated by reference to the EURIBOR or the IRPH. If this interest rate increases, then the interest on the mortgage also increases, similarly, if it decreases, then the interest payment will decrease. This is also known as a "variable rate mortgage", since the interest to be paid on the mortgage varies with the EURIBOR or the IRPH.
However, the insertion of the Floor Clause in the mortgage contract means that the mortgage holders do not fully benefit from the fall in the interest rate, since there will be a minimum rate, or floor, of interest to be paid on the mortgage. The level of the minimum clause will depend on the bank that grants the mortgage and the date on which it was contracted, but it is common for the minimum rates to be between 3,00 and 4,00%.
This means that if you have a variable rate mortgage with EURIBOR and a floor set at 4%, when the EURIBOR falls below 4%, you end up paying 4% interest on your mortgage. As the EURIBOR is currently negative, at -0,15%, you are overpaying interest on your mortgage for the difference between the minimum rate and the current EURIBOR. Over time, this could represent thousands of additional euros in interest payments.
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A floor clause, normally introduced in a financial agreement in relation to a maximum limit or a minimum interest rate, refers to a specific condition generally included in financial contracts, mainly in loans.
As a loan can be agreed on the basis of a fixed or variable interest rate, loans agreed with variable rates are usually linked to an official interest rate (in the United Kingdom LIBOR, in Spain EURIBOR) plus an extra amount (known as as spread or margin).
Since the parties will want to have some certainty about the amounts actually paid and received in the event of sharp and sudden movements in the benchmark, they can, and usually do, agree on a system whereby they are sure that payments will not be too low. (by the bank, so that it has a certain and regular benefit) nor too high (by the borrower, so that the payments remain at an affordable level throughout the term of the mortgage).
However, in Spain, for about a decade, the original scheme has been corrupted to the point that it has been necessary for the Spanish Supreme Court to issue a ruling to protect consumers / mortgagees from the constant abuses that banks inflict on them. .
The Spanish bank returns to the «Floor Clause» the «Floor Clause»
By virtue of the provisions of Royal Decree-Law 1/2017 on urgent consumer protection measures in terms of floor clauses, Banco Santander has created the Floor Clauses Claims Unit to deal with claims that consumers may make in the area of application of said Royal Decree-Law.
Once received at the Claims Unit, it will be studied and a decision will be made as to its legitimacy or inadmissibility. If it is not legitimate, the claimant will be informed of the reasons for the denial, ending the procedure.
Where appropriate, the claimant will be informed, indicating the amount of the refund, broken down and indicating the amount corresponding to interest. The claimant must communicate, within a maximum period of 15 days, his agreement or, where appropriate, his objections to the amount.
If they agree, the claimant must go to their Banco Santander branch or any other of the Bank, identifying themselves, expressing their agreement in writing with the proposal made by the Bank, signing below.
