Mortgage debt restructuring

This involves the establishment of a new payment plan that offers more favourable conditions to the debtor.

The requirements for its application are:

  • The debtor meets the so-called "exclusion threshold".
  • The purchase price of the property meets the limit imposed.
  • If foreclosure proceedings have been initiated, the auction has not yet been announced.

If these requirements are met, the bank must offer a restructuring plan within one month of the submission of the request together with full documentation.

The conditions of the new payment plan will depend on how much the effort represented by the mortgage burden on family income has increased and if there is any case of special vulnerability, so that:

  • If the effort rate has increased by at least 1.5 or there is some particularly vulnerable circumstance, the restructuring plan must contain:
    • Five-year grace period for principal repayments. This means that for five years from the approval of the plan, the debtor will only pay interest. The principal that is not paid during this period can be carried over to a final instalment at the end of the loan or prorated over the remaining instalments (a combination of the two options is also possible).
    • Extension of the repayment period up to a total of 40 years from the granting of the loan. The extension of the loan's repayment period means that the monthly instalments (after the end of the grace period) will be lower than they were originally.
    • In loans with a variable interest rate, during the grace period the interest is reduced to Euribor - 0.10%. Thus, during the first five years from the approval of the plan, the debtor will only pay the amount resulting from applying to the outstanding capital, an interest rate of Euribor - 0.10.
      If the loan were at a fixed rate, during the grace period the current fixed rate is applied.
  • If the effort rate has increased by less than 1.5, the following conditions apply:
    • Grace period in the amortization of capital of two years.
    • Extension of the repayment period up to 7 years, without exceeding 40 years from the granting of the loan.
    • Reduction of the interest rate applicable during the grace period to that which implies a reduction of 0.5 percent of the net present value of the loan in accordance with current regulations.

In all restructurings, regardless of how much the effort rate has increased:

  • The floor clauses will no longer apply, if they were included in the loan contracts.
  • If during the ten years after the approval of the restructuring plan the early repayment of the loan is requested, no compensation costs will be charged

Without prejudice to the above, the debtor may submit a proposal for a restructuring plan, which must be analysed by the institution. In the event that it is rejected, the institution must inform the debtor of the reasons for its decision.

Once these conditions have been applied:

  • If the instalment to be paid is less than 50% of the family unit's current income, the restructuring plan is feasible and will be applied.
  • If the instalment exceeds 50%, the plan will be considered unfeasible and the institution will have to inform the debtor of the successive measures provided for in the Code: debt reduction and the dation in payment of the main residence.

If at the end of the grace period the debtor continues to be within the exclusion threshold, they may request a second restructuring plan, which will include a new five-year capital grace period and the application, in that period, of a reduced interest rate, as explained above, provided that leaving the grace period is not the determining fact of being in said exclusion threshold.

If the loan is assigned, the debt can also be restructured. The Code of Good Practices applies to the entire contract portfolio of member entities. For this reason, these entities have had to adopt the necessary measures to ensure that, if the holder of the loan is in the exclusion threshold, the restructuring can be applied, even if the loan had been assigned.

  • What debt is restructured?

    Economic difficulties can lead to non-payment of mortgage loan instalments, which will accumulate and generate late-payment interest and fees for non-payment. If, given this situation, the institution has initiated legal proceedings, the debt will also increase due to legal expenses and costs.

    The restructuring plan must cover the entire mortgage debt, including past-due principal, late-payment interest, fees for non-payment, expenses and costs.

    It would not be correct that, for the application of the Code, the bank should require the outstanding instalments to be brought up to date, as these amounts constitute "mortgage debt" and should also be subject to restructuring. See the Control Committee's response  (70 KB).

    In addition, the bank may, but is not obliged to, unify all of the debtor's debts (card, overdraft, personal loans or credits). See the Control Committee's response  (78 KB).

    Is the execution of a public deed necessary for the restructuring plan to be applied?

    It is not necessary. If no new deed is granted containing the new conditions of the loan —the restructuring plan—, these conditions will be binding between the debtors and the institution. However, this agreement could not be registered in the Land Registry, so its content would have no effect against third parties, who could not be harmed by the amendment.

    If, on the other hand, the restructuring plan is executed in a public deed, the new conditions become effective between the parties involved and also vis-à-vis third parties after registration in the Land Register.

    While the execution in a public deed is voluntary, either of the parties —debtors or bank— may request it. In this case, the cost of its formalisation is borne by the party requesting it.

    See the Control Committee's response  (113 KB).

    Can the institution refuse to restructure the debt on the grounds of "loss of ranking” of the mortgage?

    No.

    The mortgage ranking is the place that each mortgage occupies in the Land Registry and determines the priority of certain loans over others.

    The bank could lose your mortgage ranking by amending the conditions that lead to an increase in the mortgage liability figure or the extension of the term of the loan due to this increase. The ranking could only be maintained if the subsequent creditors consent to it.

    However, if an institution has adopted the Code of Good Practice, it is obliged to propose a restructuring plan to the debtor that meets the requirements, and there is no provision in the regulations that exempts it from this obligation.

    It will be up to the institution to find a way to meet its obligation and, where appropriate, and in the event of the loss of ranking, it will have to consider the possibility of debt reduction, debt unification or achieving acceptance by the holders of rights registered with a lower ranking, or any other formula that may be appropriate in the case in question.

    See the Control Committee's response  (113 KB).

    Can the debt be restructured if the loan is securitised?

    Yes, the fact that a mortgage loan has been securitised does not exclude, from the outset, the application of the Code.

    See the Control Committee's response  (74 KB).

Did you find this information useful?
Mark information as useful Mark information as not useful

FREQUENTLY ASKED QUESTIONS

More enquiries

THIS MAY INTEREST YOU

More publications