Friday, 22 November 2013

Minimum floor rates on mortgages in Spain

Over the past few weeks there has been a number of news articles about abusive clauses in Spanish Mortgage deeds.

What types of clauses are being considered abusive 

One of the most publicised clauses is minimum floor rates which is where a Spanish Bank incoperates into the mortgage deed a specified rate below which the variable rate can never fall. As mortgagees started to find payments diffcult to meet many started to look at why in an environmnet of such low overall rates in Europe this was not being reflected in their mortgage payments.

Slowly this practice of ensuring that the bank in Spain earned minimum income from interest payments immaterial of what the level of variable rate was in the current market, came to light.

Why is this abusive

On a case by case basis the Spanish courts are ruling in favor of the mortgagee on the basis that whilst the practice itself is not illegal the failure to ensure the client understood what they were signing was.

Other areas of abusive clauses can the adding compulsory products like life cover where it is not a need whilst again not making this specification clear to the client before signing.  

What are the Banks in Spain doing to respond to the courts findings

Little by little Banks are starting to remove the clause of minimum rates from new deeds of those buying property in Spain and some are actually removing them from existing deeds. There is however no national directive as to what banks should or should not be doing so all cases are looked at on an individual basis.

The loss of the minimum rates will have an impact on the earnings of the banks who extensivley used them for some the removel could see next years profits wiped out completley. 

Veiw full article Spanish mortgage minimum floor rates 


Monday, 11 November 2013

Is Black money indicative in the Spanish purchase market

How did Spain look a few years ago.
Black money, so money passed in cash for the purchase of a property which was then not recorded on the deeds, was epidemic in Spain a few years ago.
Most sellers would look for anything up to 30% to not be recorded officially, and would encourage buyers to participate by telling them they would also save on purchase taxes.
What sellers and their lawyers failed to explain to the buyer was that at sale capital gains tax would be worked out based on the lower recorded level on the deeds and sale price not the actual price paid.
Notaries, Banks and lawyers all turned a blind eye to the activity and it was not unknown for large suitcases full of money to openly taken to Notary and counted out in the office.
What is different now
Spain, since the economic crisis began, has started to come down heavily on tax evasion across the board. A number of high profile court cases involving Lawyers and Notaries caught in participation of tax fraud hit the headlines making it clear that the Spanish authorities would no longer suffer its professional bodies knowingly being involved in such activities.
Aside from trying to clean up the purchase market and ensure full taxes were paid the Spanish Government also needed to show the international communities, it not only paid lip service to money laundering regulations, but enforced them. Notaries are now required to evidence the legitimate source of any cash deposits for the buying of property in Spain, and to clearly record how the full monies for the purchase was sourced.
How do the authorities in Spain check no black money passes hands
Whilst it is impossible to be 100% sure that outside the formal transaction black money has not been passed the Spanish authorities now undertake a number checks after completion to minimize the possibility.
The most relevant and most controversial of these is checking the deed price against the Catastral value which is the minimum price of the property as recorded at the Town Hall and used for purposes such as calculating IBI. If a property is recorded as being sold at a price below the Catastral value this will highlight the file as one to be looked at in more detail.
The issue with this practice has been that whilst, at one point, the values recorded at Town Halls were much lower than the prices being paid for property, on many occasions this is not now true. With prices in some areas falling by 50% it is often the case the minimum value is in fact higher than the price being legitimately paid by a buyer.
In some regions Andalucía, being one of them the tax authorities are blindly using the recorded minimum value to calculate the tax payable.
What is happening to buyers in Spain who bought at a price below the Town Hall level
Many buyers in Spain have had nasty surprises after completion when a letter drops on their mat demanding further purchase taxes be paid. This can happen even though the buyer has in fact paid full taxes on the true purchase price. There is however no arguing the tax bill with the tax office and it will have to be paid if the tax authorities pick up on the transaction, even though this is clearly unfair on anyone who was lucky enough to buy a property at a steal.  
A good Lawyer in Spain will always make one of their first checks Town Hall recorded value and advise a client that purchase tax should be reflected against this price even if the purchase price is lower. If the amount paid in tax is finally to be against the purchase price the lawyer will warn that it is possible at a later date that further taxes and possibly fines may be applicable.
This situation is a backlash to what happened in the past as the authorities use this particular measure to monitor tax evasion, without perhaps taking into account the significant and real drop in purchase prices.
What is happening where investment funds or buyers buy from SAREB
A good question to ask is what is happening in terms of tax when the bad bank SAREB sells large portfolios of property at massive discounts to investors, or when another Bank in Spain does so direct. One assumes that in these circumstances it is agreed, at point of deal, with the tax authorities that the price being paid is the price on which tax will paid. This would seem somewhat unfair on those buyers caught out by the way in which the tax is normally applied. On the other hand, who knows perhaps these investment funds may find they have problems a little way down road where a regional tax authority rather than the national one decides further tax should be paid.
The Future
It is important for property sales and recovery in the future that the Spanish tax authorities find a more transparent and fair way of ensuring full taxes are paid. As part of the tax overhaul promised by the government next year the practice of making it up as you go along has be stopped and regional tax authorities prevented from deciding black money took place without any real evidence this was the case.

Spanish property purchase news

The buying and selling data for properties in Spain September 2013
Monthly data out today showed that whilst property transfers in Spain increased slightly in September, in comparison to both year on year figures and month on month, the level of actual sales continues to come under huge pressure.
Incorporated into the monthly property transfer figures issued by the INE are foreclosures, inherited properties, commercial property and swaps.
When the numbers are broken down into the number of properties bought in Spain the data looks far from rosy.
What do the property purchase numbers look like
Total property transfers were 126,150 which was an increase of 3% in comparison to September of 2012, however actual sales of properties showed an annual accumulated decrease of 8.8% in comparison to the same time in 2012.
The number of actual sales in Spain between August to September did show a small increase of 1.1% which is the first time sales have been higher in September in comparison to August of the same year, since 2009.
How were the property sales in Spain broken down in September
Of the properties sold in Spain 44.8% were new builds and 55.2% were re-sales. Resales are holding up better than news builds and have increased 4.9% year on year.
In 2012 the Spanish Government put in place tax measures to assist the sale of new builds by lowering IVA and providing breaks on future capital gains. These incentives helped increase new build sales in 2012. The removal of these incentives in 2013 are now showing in the figures. This trend will continue for the rest of year, as sales of new builds were buoyant in October, November and December 2012 as buyers rushed to beat the withdrawal of the tax breaks.
How are the regions house sales holding up
Andalucía for yet another month had the highest amount of sales. The Andalucía region sold 5091 properties in August a small increase from previous year of 0.5%.
The Canary Islands showed the largest increase year on year up by 32.3%.
Only Andalucía, Canaries and Cataluña showed any year on year increase at all, suggesting sales are helped in those regions by nonresident buyers who are looking for holiday homes rather than permanent residences.
If overall Spanish property transfer are up is that good news
Perhaps more worrying than the stagnant residential house sales in Spain is the level of property transfers that are falling into the others pot. This is because the others pot includes Spanish bank foreclosures.
The data suggests further long term problems as Banks accumulate more and more stock from defaulted Spanish mortgages on their books. This will continue to put pressure on the Banks overall profitability as well as the oversupply and pricing of the housing stock.
Of the 30,180 Rustica properties transferred in August only 8,173 were actual sales and of the 54,486 Urban properties transferred in August only 23,805 were actual sales.