The new Code of Good Banking Practices explained

The main objective of the new Code of Good Banking Practices is to adopt mechanisms that allow households and mortgage debtors to cope with the rise in interest rates caused by the increasing inflation triggered by the war in Ukraine, as stated in the Explanatory Memorandum itself. But for this, this new Royal Decree has three main objectives:

1. To alleviate the mortgage burden of households at risk of vulnerability.
2. To restructure their debt.
3. To establish measures that strengthen the mortgage market, increasing transparency and competitiveness.

The Explanatory Memorandum of this Royal Decree states that it is among the necessary legal measures to alleviate the financial burden of middle-class mortgage debtors at risk of vulnerability due to the rise in interest rates and to facilitate the adaptation to the new economic environment of families with variable interest mortgages.

The Banking Code of Good Practices is fundamentally aimed at mortgage debtors who have been affected by the rise in interest rates, that is, it affects mortgage loans with a variable interest rate, which today see the interest they must pay increase exponentially. But these mortgage debtors, according to article 3, must meet certain requirements:

1. They must be natural persons holding loans or credits secured by a mortgage on real estate.
2. The mortgage must be on the main residence, whether of the debtor or the non-debtor mortgagor, and the purchase price must not exceed €300,000.
3. The mortgage must have been established before 31 December 2022.
4. Most importantly, the debtor must be considered vulnerable. According to the article 3 of Royal Decree 6/2012, of 9 March, which has been amended by the current Royal Decree Law 19/2022, vulnerable debtors are understood to be all households with an income not exceeding 3 times the IPREM, although the Resolution of the Secretariat of State for Economy and Business Support raises this from 3 to 3.5 times the IPREM, in 14 payments, to be able to benefit from these measures approved by the government. This amount may be increased if there are persons with disabilities, dependency situations or certain illnesses living in the household. Therefore, the following may apply:
   • The family unit whose income does not exceed 3.5 times the IPREM in fourteen payments, that is, €29,400.00 for the year 2023.
   • If any member of the family unit has a declared disability greater than 33 percent, a dependency situation or a disease that permanently incapacitates them from performing work activities, the income limit is raised to 4.5 times the IPREM, also in fourteen payments. This amounts to €37,800.00.
   • If any of the mortgage debtors suffer from cerebral palsy, mental illness, or intellectual disability, with a recognised degree of disability equal to or greater than 33 percent, or are persons with physical or sensory disabilities with a recognised degree of disability equal to or greater than 65 percent, as well as in cases of serious illness that permanently incapacitates the person or their caregiver from performing work activities, the income limit is increased to 5.5 times the IPREM, or in other words, €46,200.00.
5. That, in the four years prior to the application, the family unit has suffered a significant change in its economic circumstances, in terms of effort to access housing. For these purposes, a significant change in economic circumstances will be understood to have occurred when the effort represented by the mortgage burden on family income has increased by at least 1.2 times.
6. That the mortgage payment exceeds 30 percent of the net income received by all members of the family unit.

Debtors who meet the specified requirements can obtain both a grace period on the mortgage payment and a reduction in the interest rate. According to the Royal Decree:

1. During the principal grace period of 5 years, the interest rate will be reduced to Euribor minus 0.1%, compared to the current Euribor plus 0.25%, when the increase in mortgage effort is greater than 50%, and with a grace period of 2 years and an extension of the term up to seven years when the increase in mortgage effort is less than 50%.
2. The period to request the handing over of the property in payment is extended from 12 months to 2 years, also allowing the possibility of a second mortgage restructuring.
3. Likewise, according to the statement of reasons, “a new obligation is incorporated for the adhering entities to guarantee the safeguarding of the rights of debtors in the event of assignment of credits to third parties, which is configured as an obligation of order and discipline, to avoid the lack of protection of vulnerable families in the event of the sale of mortgage credit portfolios to a third party.”
4. Tariff reductions are applied, both notarial and registry-related, derived from the granting of the deed of novation and subsequent registration of the novations carried out under the protection of the Code of Good Practices, according to article 4 and article 10, which in turn modifies article 11 of Royal Decree-law 6/2012, of 9 March.
5. The charging of commissions or compensations for early repayment of variable interest loans or for changing these to fixed-rate loans is suspended for one year. Additionally, and on a permanent basis, article 23 of Law 5/2019, of 15 March is amended, reducing the commission for early repayment during the first three years from 0.15% to 0.05%, and to 0% after the first three years, in the case of novation of the applicable interest rate or subrogation of a third party in the creditor’s rights, provided that in both cases it implies the application during the remainder of the contract term of a fixed interest rate instead of a variable one.
6. The Resolution of 23 November 2022 adds the possibility of extending the total loan term up to 7 years, with the option for the mortgage debtor to fix the instalment at its amount as of 1 June 2022 or at the amount of the first instalment for those loans where this is charged after that date, for a period of 12 months. Meanwhile, the unpaid principal will accrue interest at a rate that implies a reduction of 0.5 per cent of the net present value of the loan in accordance with current regulations.
7. The possibility of changing from a variable to a fixed interest rate, according to what the banking entity freely offers.

Banks, credit institutions and even individuals holding mortgage loans on residential properties of individuals in their portfolio can adhere to the code of good practices, but it is a voluntary adherence by each entity. However, most have adhered, and can continue to do so in the future, with the website of the State Secretariat for the Economy publishing this. If you want to check whether your bank is adhered, you can click here.

Individuals who meet the above requirements may apply for the novation of the mortgage loan to their bank until 31 December 2024.

Once the novation request has been made, the lending institution must verify that the applicant meets the requirements set out by the Royal Decree, as well as the documents provided by the applicant. Having done this, the institution will have 15 days to formalise it.