Government and banks reach agreement to protect the most vulnerable

The Spanish Government and the banks have reached an agreement with measures to protect the most vulnerable households from rising mortgage prices that have caused the sharp rises in interest rates that the European Central Bank (ECB) has been applying since August. An agreement that “will preserve financial stability”, as reported by the Ministry of Economic Affairs and Digital Transformation, which amounts to one million households benefited as of January 1, 2023.

The Executive and the credit institutions negotiated against the clock to be able to bring an agreement to the Council of Ministers. Banking sources explained hours before that the main difference that existed between the parties was the income threshold from which households could benefit from this framework. Finally, the Executive has managed to get credit institutions to agree to expand the universe of beneficiary households to those with incomes of up to 29,400 euro per year.

The deal will alleviate the effect that the ECB’s interest rate hike is already having on mortgages. An average mortgage at a variable rate (150,000 euro to be paid in 30 years with a differential over the Euribor of 1%), paid an approximate fee of 448 euro in October of last year. However, if that same mortgage had to be updated in October of this year, the fee would amount to 675 euro, 50% more.

The Executive wanted the measures now agreed with the banks to cover the largest number of homes possible, but the banks feared that the threshold would be too wide and would end up forcing credit institutions to provision – that is, reserve funds to cover possible losses or future obligations – larger amounts on their balance sheets.

The agreement now establishes that vulnerable mortgagees (with incomes of less than 25,200 euro a year, three times the Iprem) will be extended the Code of Good Practices that the banks agreed with the Government in 2012. The code was currently limited to households with a maximum income of 24,318 euro and works as a protocol in three phases: in the first, families are allowed to only pay for five years interest on the loan (grace period), the maximum interest on the loan is limited and the mortgage amortisation period is extended to 40 years to facilitate payments. If with these measures the household continues to allocate more than 50% of its income to pay the mortgage, the next step is to request a reduction, something that the bank can refuse. Finally, if the above is not enough, the home can be delivered to pay off the loan, something that the bank is obliged to accept.

In essence, the Code of Good Practice will continue to work in the same way, but some important new features are introduced. The most notable is that now all households with an income below 25,200 euro per year and who allocate more than half of their income to pay the mortgage will now be able to benefit from it. Before, the regulations required that there had been “a significant alteration” in the economic situation of the household in the previous four years. A requirement that in the current context in which the problem is the increase in mortgage prices rather than the loss of income left many households out.

Of course, the conditions for the new homes that will be included are somewhat less favourable. The period in which they will only have to pay the interest is reduced to two years (compared to the five that apply in the rest of the cases) and they may extend the repayment period to a maximum of seven years. In Economy they consider that this measure is necessary for the families that the rises in interest rates have forced to “excessive levels of mortgage effort that force them to reduce expenses of first necessity and endanger the payment of the mortgage, can receive adequate treatment “.

The agreement also reduces the maximum interest rate that households that use the code will have to assume during the grace period. Specifically, the ceiling is reduced from a differential of 0.25% plus the Euribor to one of -0.1% plus the Euribor. In the same way, the term to be able to request the dation in payment of the house is extended to two years and the possibility of a second restructuring is contemplated, if necessary.

The department headed by Nadia Calviño calculates that a family with a mortgage of 120,000 euro and a monthly payment of 524 euro after the interest rate review will see its payment reduced by more than 50% during the 5-year grace period, up to 246 euro.

The second leg of the agreement develops a “new Code of Good Practices” that focuses on middle-class mortgagees. The objective is that these families can have “a more gradual adaptation” to the new environment of interest rates. To reach these households, the agreement extends the maximum income limit to 29,400 euro to qualify for this second code. In addition, families who allocate more than 30% of their income to pay the mortgage will be able to benefit from it, although they will have to demonstrate that their mortgage burden has risen by at least 20%.

For these middle-class mortgagees, the banks must offer a freeze on instalments for 12 months. In other words, these households will pay the same mortgage payment for one year. Once that year has elapsed in which the instalments will not be able to rise, they will be offered a lower interest rate on those twelve months that have been frozen -which they must pay at the end of the loan- and the possibility of extending the term of their mortgage until seven years.

Economy also announced that expenses and commissions will be further reduced to facilitate the change from variable to fixed rate and commissions for early repayment and change of mortgage from variable to fixed rate will be eliminated during 2023. Measures for the promotion of financial education will also be included and monitoring of the application of both codes will be strengthened.

The two Codes of Good Practices -which are expected to be available by January 1, 2023- will be voluntarily adhered to by financial institutions, but they will be obliged to comply with them if they sign them. The first Code of Good Practices approved in 2012 was signed by practically all credit institutions in Spain.