As we have already seen, prior to the financial crash of 2008 the Spanish Property market and its associated service sectors were rife with corruption and a scant application of regulation. The banking sector was no exception.

While there were legal restrictions on the ratios of lending to property value and rules guiding the assessment of repayment affordability, the regulations were regularly interpreted in such a way as to make them meaningless. 

If a bank was restricted, for example, to loaning a maximum of 80% of a property’s value and the applicant needed 90% they would simply ask the ‘independent’ valuer to overinflate the property valuation and loan against the higher figure. It was not unusual for buyers to obtain mortgages well in excess of 100% of the actual purchase price of the property (and remember the official price entered on the deed was often even lower than that) using the excess to help fund the taxes and mortgage set up costs. Property values were rising so quickly at this point that the banks assumed that so long as the borrower could keep up with the first year’s payments, the property value would rise sufficiently to eliminate the banks risk.

This recklessness also extended to affordability checks on the borrower. Mortgages could be granted based solely on the borrowers last 3 payslips and their previous years tax statement. While repayments should not have equalled more than 30% of the borrower's income, no enquiry was made as to the borrower's existing financial commitments. Their entire disposable income could have been committed to mortgages or loan repayments in their home country and the lending bank, deliberately, would be unaware.

The involvement of unlicensed brokers was also a significant issue during this time. Many banks were happy for anybody to act as an introducer offering them a referral fee that was simply added to the mortgage set up fee. Most estate agents would happily introduce their clients to their local bank manager without realising that the agent may be taking as much as 1% of the loaned amount as a kickback. These brokers operated without proper oversight or regulation, and many engaged in unethical practices such as misrepresenting the terms of mortgages or even charging exorbitant fees on top of the referral that they were already set to receive from the bank. The borrower would often not come to appreciate the full terms and cost of their mortgage until the deed was read out at the notary, at which point backing out would mean cancelling  the property purchase and losing tens of thousands of euros in fees and lost deposits.  These practices not only contributed to the overall instability of the property market but also left borrowers vulnerable to exploitation. The banks most certainly exploited these vulnerabilities.

Over the last decade there have been several judgments from the Spanish Supreme Court and the European Court of Justice finding clauses commonly found in mortgage agreements of this era to be “abusive”.

Amongst other controversies banks have had to pay back billions of euros of unfair set up fees, they have had to repay land registry fees which were always paid by the borrower despite the fact that it was only in the interest of the bank to have the debt registered. They have had to repay billions more after it was found that a practice of insisting that borrowers take out an insurance to protect the mortgage against insolvency and pay the entire premium in one got at the point of the registering the loan was abusive. Sometimes this meant that tens of thousands of euros would be added to the mortgage and only revealed to the borrower at the notary when it was too late to back out. Of course it was the bank that provided the insurance itself at an inflated cost. 

One widespread example of an abusive practice was the use of floor clauses (cláusulas suelo). Floor clauses, included in the mortgage deed, would set a lower limit on the interest payable on the mortgage. If, for example, the mortgage rate was set to track at 1% over the euribor (the European Central Bank’s base rate of interest) the floor clause might stop the overall rate payable from dropping below 2%. This meant when the Euribor dropped to just above 0% and stayed there for several years following the financial crash, the borrower would have continued paying 2% interest when they should have been paying just over 1%.

You may wonder why this was deemed to be “Abusivo” by the Supreme court, the borrower after all agreed to it, but according to the court’s judgement, the borrower was unlikely to have understood the significance of the clause, they were not likely to be economists and interest rates had been well over floor clause levels for decades, furthermore the clause was often only revealed once the buyer was past the point of no return and finally, as a further example of the bank’s exploitative nature, there would be no ‘ceiling’ clause.

The euribor could rise without a cap and the rate of interest payable by the borrower would rise with it. The banks were eventually forced to repay billions more to lenders to cover the overpaid interest plus compensation; however for many borrowers it was too late. They had already fallen behind on repayments and lost their homes.

The combination of these reckless practices and abusive clauses ultimately had a devastating impact on the Spanish mortgage market and the broader economy. When the global financial crisis hit in 2008 many borrowers were left struggling under the weight of their debts and the Spanish banking system (as with many others around the world) required significant government intervention to avoid collapse. During this time many smaller regional banks did fail and were swallowed up by bigger entities.

As I continue with this chapter, and I describe the general terms and conditions of mortgages in today’s market I’m pleased to say that the mortgage market and banking sector in Spain has changed considerably. Lending restrictions are tighter, due diligence is more thorough and the abusive practices I have described have been struck down by the courts. However it’s important to remember that none of these changes happened because the banks suddenly grew a conscience and started caring for the consumer. They were forced to change, either by the economic consequences of their actions or the condemnation of the courts and regulations imposed by the government. They fought all the way to the ECJ to avoid having to pay compensation that, ethically, was very clearly due.

If you need a mortgage to purchase a property in Spain, make sure that you understand the market and that you choose the right professionals to help you. I'm going to go through all of that in the rest of this chapter. Doing so will almost certainly save you money in the immediate term and it may save you everything in the long run.