Another Mortgage Time Bomb

People with variable rate mortgages in Spain pay an interest rate that is the ‘Euribor’ rate (an inter-bank overnight or short-term lending rate) plus the interest rate fixed by the bank. If the Euribor is 5% and the bank rate is 1% the total interest paid is 6%. The actual amount paid fluctuates as the Euribor rate goes up and down and many banks adjust the interest every January 1st.

In September 2008, the Euribor interest rate was 5.1%, the highest since December 2000 when it was 5%. In 2011 it was 1.3% and then it started to fall dramatically to 0.25% in 2014. In 2015 it was 0% and then it became a negative amount in February 2016. This October, the Euribor fell to the lowest interest rate ever, at minus 0.53% and there is no current indication that it will soon rise.

Banks and other lending entities have always stated that if the Euribor plus the bank rate falls below 0% the mortgage holder is not entitled to a refund. In October, a Spanish Euro MP referred this to the Central European Bank and their President replied that lenders should have to pay back a mortgage holder the negative rate of interest unless there was a legal agreement otherwise. He ruled that if a variable rate mortgage contract solely specified that the client paid the corresponding Euribor rate plus the bank interest rate, this applied whether or not the total interest rate went negative, and if it did so, the lender had to make a refund. This was calculated to be a probable total of 300 billion euros in Spain in September, because the average Euribor rate for the month was minus 0.46%. Throughout Europe the amount w a s c a l c u l a t e d t o b e o n e b i l l i o n e u r o s .

In June 2019, the Association of Spanish Banks decided that mortgage contracts should have a clause that stipulated that the minimum rate on a variable rate mortgage was 0%, not a negative amount. In reality, not every mortgage lender included this minimum 0% clause so where there is no such minimum rate it appears that a refund has to be made. Whist this is very bad news for lenders, the recent ruling from the Central European Bank has left open the question as to whether Spanish lenders with mortgages signed before June 2019, when there was no minimum 0% interest in the contract, have to make refunds. This is a potential time bomb and Spanish courts will no doubt be hearing test cases as to whether banks should pay their mortgage holders the negative rate.

The Tribunal of Financial Services in the Low Countries ruled in 2016 when the Euribor went negative that banks had to pay the borrower when the total interest rate went negative as well. Last year, the Danish Jyske Bank (the third largest bank in Denmark) offered 10yr mortgages with an initial negative rate of interest so until the combined rate goes positive there is no interest to pay. This seems crazy, but the mor tgage payments every month can be invested to give a profit. The Nordea Bank is a large European bank with a major presence in Finland, Norway and Denmark and they are marketing mortgages over 20 years with a fixed 0% interest.

Fixed low rate interest mortgages where the client pays the same amount ever y month were unknown in Spain until recently, but banks gamble that over the total mortgage term they make a profit. We feature these types of mortgages in our ‘In the News’ section.