Compensation for withdrawing a mortgage

Regulations and limits for this type of compensation, which may apply to some mortgages
Compensation for withdrawing a mortgage is an amount that banking institutions can charge when a loan is cancelled or partially or fully repaid. This compensation is regulated by Law 41/2007 of December 7, which modifies Law 2/1981 of March 25, on Regulation of the Mortgage Market, as well as by other regulations for the mortgage and financial system. Financial institutions are allowed to receive additional money for the corresponding administrative procedures, and as compensation for what they expected to earn (lost profit), since they will no longer receive interest on the amount that is repaid early. In any case, the following requirements and limits are established:
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Mortgages signed before December 9, 2007

For a variable-rate loan, financial institutions can charge up to 1% of the amount repaid or cancelled, when this repayment is not due to switching the loan to another entity (mortgage subrogation).

Mortgage loans signed after December 9, 2007

For individuals with a variable-rate or fixed-rate mortgage on a home, the Law establishes the following conditions:

  • Up to 0.5% of the amount repaid early, if this takes place within the first 5 years of the life of the loan.
  • Up to 0.25% of the amount repaid early, if this takes place after the first 5 years of the loan.
  • Financial institutions can agree to compensation below the amounts established by law.
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Compensation for interest rate

For fixed-rate or mixed-rate mortgage loans, the Law allows another type of compensation to be charged in addition to the amount for withdrawal. This involves compensation for interest rate risk. This can only be charged for fixed-rate mortgage loans with a term greater than 12 months.

The financial institution can freely negotiate the amount of this compensation. However, it can only be charged if the cancellation produces a loss for the entity, which will usually occur when market rates are lower at the time of cancellation than the rate the customer is paying.

Finally, the bank must establish which of the following two modalities is applicable in the event of early repayment:

  • A fixed percentage, applied to the outstanding amount of the loan.
  • The full or partial amount of the loss the cancellation causes to the entity. In this case the entity must also pay the customer, in the same proportion, for any gains produced.
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