The Bank of Spain justifies the higher fixed-rate mortgage costs in the new law

11/06/2019

The Bank of Spain justifies that the commissions for the early maturity of mortgages at a fixed rate are 10 times higher than those of variable rates so that financial institutions could incur losses in certain circumstances if they were minors. In an article on the entry into force of the law, which will take place on June 16, which is published on Thursday in the Quarterly Quaderns of the Spanish Economy, the regulator points out that lenders (banks) could incur "In financial loss in the event of an early repayment".

This loss appears - affirms - when the market interest rate is reduced below the mortgage, since in this case the lender ceases to enter the interest agreed upon during the life of the loan and finds lower market returns The time to reinvest the funds amortized in advance in assets of similar characteristics. The report emphasizes that the loss depends fundamentally on the residual mortgage life period and the (positive) distance between the mortgage and market interest rates. Also, the level of market profitability.

This circumstance refers to the limitation of the maximum c omissions for early repayment in the new regulation. That is, when the client returns a part or all of the debt in advance. In contracts at variable interest rates, the regulation reduces the maximum commissions, which go from 0.5% to 0.25% of the capital amortized, as they occur in the first five years of life or later. But, in addition, maximum limits are introduced to commissions for early repayment in loans at fixed interest rates, which are 2% of the capital amortized the first 10 years of credit life and 1.5% later, virtually 10 times higher than those of variable type.

Effects on the market
For the Bank of Spain, which already pointed out in an earlier period that it could have an effect on the increase in loans, the entry into force of the law will have other effects on the market as a result of the introduction of imperative clauses of Obligated compliance, as in the case of maturity regulation and early repayment. It also indicates a reinforcement in the information available to the client in the pre-contractual phase. In this sense, the supervisor is expected to contribute to reducing the legal uncertainty "and the high current litigation of the market." What should result in a greater credit activity and a better operation of the mortgage segment.

It also considers that greater competition in the market may arise from national operators, but also foreigners, thanks to the greater transparency and standardization of the information and the lower transaction costs associated with the change of provider that the law implies.