What is compensation for interest rate risk?

We'll explain to you what this clause is about and consider which mortgages can apply it

Spanish Law 41/2007 of December 7, on Regulation of the Mortgage Market, allows compensation for interest rate risk to be charged in cases involving full or partial, subrogation or non-subrogation repayment of loans and mortgages, when this takes place within an interest-rate revision period with an agreed duration of over 12 months.

This compensation, which affects loans and mortgages formalized after December 9, 2007, is applicable when the mortgage (guarantee) is for a property and the borrower (the debtor) is an individual or small business (according to the business tax criteria). It is intended to reimburse the bank when the loan or mortgage is repaid early and this generates an economic loss for the entity. In no case will this compensation be allowed to exceed the amount of the loss generated.

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The loan or mortgage contract must specify which of the following methods will be applied to calculate the compensation for interest rate risk:

1. A fixed percentage that will be applied to the outstanding balance at the time of repayment.

2. The loss, whether total or partial, that the repayment generates for the entity, calculated as the difference between the outstanding balance at the time of early repayment and the market value of the repaid loan or credit.

According to Law 41/2007 of December 7, for fixed-rate loans or mortgages, or those with a variable interest rate and a revision period greater than 12 months, no fee may be charged for early repayment, whether full or partial. However, compensation for withdrawal and/or for interest rate risk can be agreed upon.

Compensation for withdrawal, which establishes compensation for any losses a bank may suffer due to unilateral withdrawal from the contract, can be agreed upon for variable-interest loans or mortgages where the revision period is equal to or less than 12 months, as well as for fixed-rate or variable-rate loans or mortgages with a revision period of greater than 12 months, as long as these were formalized after December 9, 2007, and meet the conditions established in Law 41/2007.

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In addition to this compensation, Law 41/2007 of December 7 establishes compensation with respect to the loss that a bank may suffer from unilateral withdrawal from the contract (compensation for withdrawal). This law also indicates the maximum amounts that a bank may charge under this concept:

- The maximum compensation for repayment within the first 5 years of the life of the mortgage will be of 0.50% of the amount repaid.

- The maximum compensation for repayment after the first 5 years of the life of the mortgage will be 0.25% of the amount repaid.

Both the compensation for withdrawal and compensation for interest rate risk must be specified in the contract and in the mortgage offer provided by the bank. Therefore, it is recommended to read the loan terms and conditions very carefully and to contact the bank if you have any questions or doubts.

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