Making the right decisions under stress isn’t easy.  Facing a monthly mortgage bill you can no longer afford is one of the most stressful positions to be in but keeping a cool head is vital if you are not to make a bad situation worse. 

This article is designed to help you review your options and make a clear plan of action should your problem mortgage happen to be in Spain.   I have concluded with a section called “Negotiating with the bank” because dealing with a mortgage you can’t afford almost invariably involves facing the lender head-on.

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1.   Rental income

The traditional option of renting out any unoccupied property is unlikely to be much use right now as the depressed market for rentals in Spain is one of the main reasons for mortgage payment problems in the first place.  However before you take any extreme steps you should be happy that you have done all you can to maximise this source of income whether by improved marketing or dropping rates.

Another possibility is to consider “renting with an option to buy” as a solution to your problems.  If no outright buyer can be found you could offer some variation of this option to potential buyers/renters which could help pay the mortgage and potentially lead to a sale of the house at a price which clears the debt.  A good, professionally drawn-up contract is absolutely essential if you are offering a rent-with-option-to-buy deal.

2.  Reduce non-mortgage outgoings

Again anyone looking for advice because they are struggling to pay their mortgage will probably have cut back to the bone already.  However it is still an idea to list your monthly outgoings and see if there are savings to be made particularly on things that are more expensive in Spain such as phone/internet packages and electricity bills or other items you have control over like petrol and other car costs, insurance and memberships.

3.  Seek relief under the Spanish government bail-out

The government announced a scheme late last year to bail out some mortgage-payers (mainly unemployed ones) by allowing them to defer half their mortgage payments by up to two years.  This is unlikely to be of much use to more than a tiny minority of foreign residents so I won’t expand on the details of scheme but they can be found online 

4. Reducing your mortgage interest rate

With the reference rate for most Spanish mortgages, Euribor, being so low (1.3% as I write) and most banks adding on a spread of around 1%, most borrowers shouldn’t be paying a high interest rate.  If you are paying much more than say 3% at the moment it is probably because:

-         Most mortgages only reset annually and rates were over 5% this time last year so you may be paying a high rate temporarily while you wait for a reset. 

-         Your mortgage, like mine, has a “collar” (minimum) rate which places a lower limit on how low the rate can go even when Euribor goes to the floor.  My mortgage has a lower limit of 3.75% and some banks have collars as high as 5%.

If your rate is one of the high ones the bank is not likely to concede a rate reduction.  If your mortgage is due to reset at a lower rate in the coming months they will tell you to wait.  If the problem is a high collar,  they have a signed contract on their side and will point this out.  There has been a lot of adverse comment in the Spanish press about collars which affect about 90% of mortgages and even calls for the government to invalidate them as unfair and “abusive”.  The Spanish Consumer Union (UCE) advised victims of high collars to seek offers of better terms from other banks and use these to persuade your bank to reduce their collar.  They say some banks have already removed these clauses under pressure.

In reality changing banks is unlikely to be an option even though you have the right under Spanish law to change your mortgage to another lender offering better terms. This is an expensive with penalties and other costs adding up to perhaps 6% of the loan (there will be costs for both the cancellation of the old mortgage and the granting of the new one). You will need to prove your ability to pay the new mortgage which is unlikely if you are in difficulties, particularly if you’ve already missed a payment.

5.  Reducing capital repayments

Many distressed Spanish and foreign resident mortgage payers have negotiated changes to their capital repayment terms. Being granted either an interest-only period without having to repay capital or extending the term of the mortgage could cut your monthly payments to a manageable level.  Two questions come quickly to mind – will the banks accommodate you and is it a good idea?

If you are in genuinely struggling with your mortgage but are willing and able to cope with a reduced payment plan, the bank may well accommodate you whatever their initial attitude is [see last section “Negotiating with the bank”]. Whether a deal is a good one or not depends on the terms, your circumstances and your attitude:

6.   Sell up

Only a small number of struggling mortgage payers will be able to sell up as a solution as it involves finding a buyer in a bad market at a price which covers the mortgage.  I am certain however that there are people struggling with their mortgage but who are not pricing aggressively to sell, either because they are hoping the property market will bounce back or because they can’t bear the thought of realising a big loss.  A harder-headed approach would be to draw a line under the past, cut your losses and remove the risk of a disastrous repossession by selling at a discount.

7.  Sign the property over to the bank

Banks will sometimes agree to take ownership of a property in return for writing off the mortgage debt under a procedure, established under Spanish law, called “Dación en pago”.  This option will normally only be available if there is a decent margin of equity in the underlying property which will allow the bank to sell it on without losing money.  Thus for a mortgage struggler with a loan outstanding less than the value of the house, this is an option which draws a line under the episode crucially without any impact on their credit rating in Spain or the UK.  Banks are not obliged to accept the proposal but some do rather than face the lengthy and costly repossession route.

If you are considering this option you should act before actually going into mortgage arrears.  You should note that it is not your valuation of the property that matters for this purpose.  The bank will not even look at a Dación unless their preferred “tasadora” has done a valuation (often the banks have very close relationships with the valuers so it may not be a fully arms-length valuation).  Finally hire a lawyer to ensure that you really are walking away with a “clean sheet” and there is no possibility of residual debts coming back to haunt you.

8.  Stop paying the mortgage

For those in negative equity and struggling to pay their mortgage there aren’t really any options that could be called “solutions” and it is often this group that stop or reduce their payments and just let events take their course, either leaving the property and perhaps the country or hoping to live on as long as possible in the mortgaged property prior to foreclosure.  There are several reasons why a more positive and active approach is still to be recommended in even these dire circumstances:

-         if you talk to the bank prior to missing payments they may be more sympathetic than you expect and offer a deal which staves off bankruptcy (e.g. conversion of the mortgage to a rental contract)

-         if you miss payments without talking to the bank and become a “delinquent” borrower you may be given a very hard time by the bank or even professional debt collectors

-         you will lose all control over what happens and the costs of repossession, including legal fees and penalty interest, will be higher than necessary

-         you will not escape liability by returning to the UK where Spanish banks have every right to pursue you for uncleared debts and expenses

9.  Request repossession

Requesting repossession may sound akin to a turkey asking to be put in the oven but it could make sense in some circumstances.  For instance if a mortgage has become unaffordable and no amount of “restructuring” is going to change this, then it is often best to bring forward repossession because any payments you make will be “good money after bad” and any you miss will simply add to the ultimate debt you are liable for.

In fact minimising the final debt after repossession is the main consideration.  With penalty interest on missed payments often charged at over 20% and the process taking up to 3 years, even a small amount of negative equity can leave a huge debt particularly when inflated fees are added in and a quick sale has been pushed through at auction.  If  you demand that repossession starts immediately you may keep this residual liability to a sum small enough that the bank will just write it off.  A repossession request can also be a negotiation ploy [see below].

10.  Negotiating with the bank

This final section isn’t a separate option, it just expands on the points I have already made about talking to the bank, suggesting some do’s and don’ts and what to expect.

If you walked into your bank tomorrow requesting more favourable repayment terms you would likely get very short shrift as, in general, Spanish banks take a very inflexible position: pay us what you owe.  However, because banks are suffering a tidal wave of defaults across Spain, they are having to change their attitudes and with persistence you should be able to negotiate a deal.

DO talk to the bank before you have already missed a payment or particularly if you are more than three months in arrears.  Banks will be keener to offer a deal before they have had to make provisions against your loan when to some extent the damage has been done from their point of view.

DO be honest about your change in circumstances, tell the bank the full facts and set out what you can and cannot accept by way of resolution.

DO make sure language is not a barrier by taking along a friend or advisor to translate if necessary.  Go in person to the bank rather than attempt to discuss over the phone or by email.

DO have a clear idea of your objective going into the bank and stick to your guns.  For example you should be clear on whether you want breathing space (e.g. option 5) or to draw a line under the problem (e.g. option 7).

DO seek an expert opinion on any offer you have received before you commit to it, if you are in any doubt as to what it entails or whether it’s in your best interests.

DO NOT be pressed into accepting a deal which you still can’t afford.  This will just “kick the can down the road” which may suit the bank but which will prolong your agony.

DO NOT be cowed or put off by an intransigent or aggressive response from the bank.  Remember that your problem is also their problem as they don’t want an expensive and time-consuming repossession. 

DO NOT let emotions of guilt, anger or anything else cloud your judgement.  It’s time to be coldly business-like and protect your interests as best you can. Certainly don’t feel embarrassed by your predicament; hundreds of thousands of Spanish householders are in the same position and to some degree the banks caused the crisis by lending recklessly.