Have you heard of the floor clause and the ceiling clause? Do you know what both imply when signing a mortgage? Are they legal or are they considered abusive practices? If my bank requires me to sign a ceiling clause, can I negotiate the interest in a private way? Worth? In which cases is it recommended to do so?
If you are considering buying a house or an apartment, it is easy that many questions arise and that you are interested in all your financing options and what they imply in the short, medium or long term. After all, when we apply for a mortgage it is important that we know what we are going to commit to and what the law says about it.
At Sky Marketing we are experts in the real estate market, and in this article, we explain what one of the terms that has generated the most debate in recent years is and what it consists of: the mortgage ceiling clause.
The floor clause to understand the ceiling clause
Before talking about the ceiling clause, we must explain another related concept that has also generated many headlines in recent years: the floor clause.
This term is used to refer to the so-called “mortgage floor” and consists of applying a minimum interest to variable mortgages regardless of their reference index.
What does this mean in practice? Basically, that both before and during the crisis, in the so-called years of the real estate boom , many of the variable mortgages that banks granted were linked to the signing of a contract by which the user agreed to always pay a minimum interest and that it used to not go below 3% . In this way, when the Euribor (which is the benchmark, most used in Spanish mortgages) began to fall, many mortgaged found themselves having to pay much larger installments on their mortgage than they would have to pay according to their type reference.
Obviously, variable mortgages were granted in very good condition and, by assuming this interest rate, the client already knew (and assumed) that they were exposed to market fluctuations in their monthly payments. The problem is that on many occasions, and as time and justice have shown, the floor clauses were incorporated with a lack of transparency on the part of the banks, from where their consequences were not communicated to the clients.
For this reason, in May 2013 the Supreme Court declared the floor clauses void, considering them “abusive”. Since then, hundreds of people have claimed the money paid for the “mortgage land” according to the guidelines established by the Court of Justice of the European Union.
Ceiling clause: what is it, how does it affect and when is it considered “abusive”
On the “opposite side” of the floor clause would be the ceiling clause which, by definition, and as its name suggests, implies putting a cap on the interest rate on variable mortgages. In other words, in these cases, the bank and the person who contracts the mortgage agree on a maximum interest for the monthly installments, regardless of the variables in the reference indices.
At least theoretically, the ceiling clause provides greater security to those who contract a variable mortgage, although in reality both parties would benefit:
- The debtor ensures that he will never pay more interests than those agreed, even if the value of the Euribor skyrockets.
- The bank or savings bank, for its part, has less risk of defaults.
However, is the roof clause really advantageous? Can it be applied in Spanish law? In principle, and based on what is established by the jurisprudence of various courts, neither the floor clause nor the ceiling clause of mortgages are illegal , provided that the client is duly informed of both and that he states it at the time of signing the the mortgage at the notary’s office.
So why do some experts claim that it is an abusive practice?
The controversy of the ceiling clause is linked to the real benefit that the client obtains with its acceptance, since normally the limits that banks establish are usually so high that it is practically impossible for the mortgage interest to skyrocket so much. This means that, if a bank includes both (floor and ceiling clause) in our mortgage contract as a condition, it is very easy for it to benefit from the first, while it is practically impossible for the client to obtain any real benefit.
Therefore, if a bank advertises the ceiling clause as an advantage when signing the contract and its percentage is very high, it is considered that the rights of the clients are being violated.
On the other hand, all mortgages have two parts:
- The first is a loan that is given to the client for the purchase of the home.
- The second is a mortgage that serves as a guarantee for the bank, so that if the debtor does not pay, he has a series of rights over the property.
The problem is that if a mortgage includes a roof clause “to merely mortgage purposes,” said cap of only affect interest at the second part of the contract, i.e., it only takes effect if foreclosure occurs, but not during the loan.
The ceiling clause is also considered abusive, and therefore illegal, if it is very disproportionate to the floor clause: remember that the first (ceiling) benefits the users and the second (floor) the banks.
What do the experts say?
Negotiating a clause with the bank can be an option to take into account if we want to contract a variable mortgage with a long repayment term (20, 25 or 30 years) because, in the short and medium term, interest rate increases do not they are usually so blatant.
If the mortgage we want to take out is for 10 or 15 years, it is better to avoid these types of clauses.
In principle, the ceiling clause can be a protection for users in cases of excessive rise in interest rates. The “problem” is that the bank will also force a floor clause to be agreed. Some issues that make both are considered abusive are:
- That when agreeing to the ceiling clause the floor clause and its effects are not reported.
- That the clause does not appear in the binding offer (pre-contract), but does appear in the final contract.
- That there is a disproportionate difference between the floor clause and the ceiling clause of the mortgage.
If you have already signed a mortgage with a floor and ceiling clause and want to make a claim, your options are to do so by judicial means (report the bank to the court specialized in abusive clauses), or by extrajudicial means (file a claim with the Customer Service of the bank and agree with the entity conditions and an amount of money to be returned).
Looking for a new home? At Tajarat properties we advise you throughout the process: we find the house or flat that best suits your needs and interests, and we advise you to find the best financing. Get in touch with us!