Bank of Spain sets July deadline for evaluation of mortgage floor clauses

Central lender also joins voices heralding green shoots in Spanish economy

Bank of Spain governer Luis María Linde during a recent appearance in Congress.
Bank of Spain governer Luis María Linde during a recent appearance in Congress. ULY MARTIN

The Bank of Spain has given lenders in the country until July 31 to properly evaluate their mortgage loans containing interest rate floor clauses. What’s more, the central lender is calling on banks to calculate “the impact that the elimination of these clauses could have should it be deemed necessary to abolish them.” The call comes in the wake of a recent Supreme Court ruling, which, the Bank of Spain reminded lenders, “declared floor clauses to be null and void in certain mortgage loan contracts.”

Interest rate floor clauses impose a limit on the extent to which consumers can benefit from lower borrowing costs, should the reference index used to set mortgage rates fall — in Spain the one-year Euribor interbank rate is usually used. Earlier in June, the Supreme Court clarified a judgment delivered in May declaring floor clauses null and void if they breach the levels of transparency demanded by the law. The clarification stated that any of the six potential areas it identified where transparency demands may have been breached within the context of a mortgage contract was sufficient grounds for these clauses to be nullified.

In the wake of this sentence, the central supervisor has warned the sector that it will have to “revise the adaptation of floor clauses included in home loan portfolios to the criteria of transparency established in the recent ruling.”

Home loans granted in April fall 18 percent on last year


The aversion to risk that has taken root in the Spanish banking system has seen the number of mortgages granted in April of this year fall 18 percent compared to the same month in 2012.

The total number of home loans signed in the fourth month of this year was 17,508, which represents the second-lowest figure since the current series began, according to data published Wednesday by the National Statistics Institute (INE).

The figures confirm that the number of home loans granted is still yet to hit rock bottom, after three consecutive quarters of falls — and even more concerning, nearly six years after the real estate bubble burst.

Lower repayments

The figures also reveal that the banks are lending smaller and smaller amounts. In April, the average home loan was 94,023 euros. This downward trend, however, has its upside, since it reflects a general fall in house prices, allowing families to spend a lower proportion of their salaries on mortgage payments.

According to the INE report, 91.4 percent of mortgages signed in April carried a variable interest rate, compared to 8.6 percent with a fixed rate. The Euribor continues to be the reference index that is used the most for home loans, given that it formed the benchmark rate for 81 percent of new contracts in the month of April.

As such, the Bank of Spain, which is governed by Luis María Linde, has called on the sector to “pay special attention when offering home loans that include this type of clause,” reminding them of the need to “protect clients using banking services.”

A glass half full

Meanwhile, on Wednesday the Bank of Spain also joined the chorus of voices that has spent the last few days trying to get the message across that when it comes to the Spanish economy, the glass is half full and not half empty. According to the central lender’s latest economic bulletin, for the month of June, the scant data available for the second quarter of the year is pointing to an “improvement” in the economy.

This recovery, however, would not come as a surprise given that forecasts suggested that the economy would suffer toward the end of 2012 and during the first months of this year. That contraction was caused by a combination of factors, including government austerity measures, which coincided with a return to recession for the euro zone as a whole. But now the Bank of Spain is suggesting that “the indicators that measure the confidence of households and small businesses were, on average in April and May, slightly above the levels that were seen in the first quarter.”

What’s more, the central lender said that the investment indicators that are currently available point to possible improvements in the second quarter, in particular for capital goods. On the down side, the lender expects the contraction in activity in the construction sector to continue.

The analysis offered by Spain’s central bank is in line with the forecasts offered earlier this week by Economy Minister Luis de Guindos. The ministry is forecasting growth rates close to zero in the second quarter of this year but believes positive growth will return in the third quarter.

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