Will it have a tassel in the mortgage loan?

The PS and the Left Bloc intend to create a kind of interest credit that can be written down in the installment of the house when the Euribor returns to positive values.

29 Mar 2018 min de leitura

But what is it about?

The negative Euribor theme returned to the limelight with the agreement between the PS and the Left Bloc, in the sense of generating a kind of interest credit that could lower future installments of housing credit. The idea will be, when the Euribor return to positive territory, customers can enjoy a small discount on their monthly bill with the credit of the house. To answer the question: "Will there be a tassel in housing credit?" A guide with questions and answers has been prepared to understand what is at stake.

What is Euribor?

Euribor is a fee based on the average interest charged by banks in the Euro Zone to each other to finance themselves. That is, it works as an interbank rate. In addition to this function, the Euribor is also the most recurrent index in housing loans in Portugal.

It is from these rates that the banks carry out housing loan contracts. In addition to the spread (bank's profit), each loan agreement for home purchase has a Euribor rate of three months or six months.

Why are these rates in negative territory?

Because the European Central Bank (ECB). Since March 2016 this has maintained the deposit rate at -0.4%. The central bank uses this deposit rate to remunerate or burden the money that the commercial banks of the Euro Zone leave in their vaults.

"It was in June 2014 that the central bank put this rate at negative levels with the expectation of" forcing "commercial banks to lend more money to companies and families. So, on the side of the banks, knowing that they would lose if they left money parked at the ECB, a better option would be to make that liquidity available to the economy. "

What is the impact on housing credit contracts?

The interest rate paid to the bank for a home purchase loan has two components: a spread that is variable according to the risk of the customer (and which represents the bank's profit / profit margin), to which the rate is added market benchmark - to Euribor.

Thus, in a scenario where the Euribor has fallen as in recent years, variable-rate housing loans have benefited from a reduction in benefits paid each month to the bank. But the decline in Euribor was so sharp that it fell to negative values and the question was asked: should banks "pay" part of the loan because of this?

What does the Bank of Portugal recommend?

"At an early stage, the Bank of Portugal said yes: banks should amortize capital in housing loans always to Euribor in negative amounts so require. In a circular letter issued in March 2015, the central bank read as follows: "No limits may be introduced on the variation of the indexer that prevent full production of the effects arising from the application of this legal rule."

Negative Euribor and Mortgage Credit

Clients with a variable rate credit agreement would benefit, obtaining a spread discount. But those with very low spreads, the discount would not be applied in full. The regulator accepted the interpretation of the banks, which only reduced (and continue to decrease) the negative Euribor to the spread, thus imposing a minimum interest rate of zero on the contract. That is, banks can never repay part of the loans even if the negative Euribor rates more than cancel the spread.

"When this question arose, the Portuguese Banking Association (APB) immediately protested against the application of the negative value of the Euribor in the final rate, saying that the Euribor should take the value of zero, which would allow banks to continue to charge the value of the spread. As an argument, the APB emphasized that the granting of credit is done through what is known as a "loan agreement onerous," which presupposes the payment of interest of the bank client. "

What do PS and Block propose?

About two years ago, the Left Bloc and the PCP launched the proposal to force banks to fully reflect the negative Euribor on contracts. After this time, the legislative idea will now leave the drawer with the agreement between PS and Block, which intends to delay the impact of negative Euribor banks for when these rates enter positive values.

In practice, it is intended to create a kind of interest credit that will lower the installments of the house when interest rates rise, preventing banks from now paying a small part of the loans. According to João Galamba, the two parties reached "a balanced solution, while preserving the stability of the banking system in terms of solvency ratios and the safeguarding of clients' rights."

"This solution does not expose banks to an immediate loss, but ensures that when interest rates rise - and banks already have a positive interest rate to be charged - the credit previously written off that interest," was the socialist party.

Banking does not support PS proposal - Refusal of negative rates

"It is not known exactly how many customers can benefit from this tassel, but it is estimated that there are not many contracts for home purchases with spreads below 0.3% - and that they could more easily take advantage of these interest" credits. "

Still, the banks are against. "The approval of such a measure would be manifestly inconsistent and unbalanced, and excessively restrictive of the freedom of private economic initiative, and as stated by the Bank of Portugal at a hearing in Parliament in April 2016, could have irreversible medium- and long-term costs for the sector, "says the APB.

And out there?

The issue of negative Euribor and its effective application to housing credit agreements is not exclusive to Portugal. In Spain, the case became known at the end of 2016, when the Court of Justice of the European Union considered that there was "total retroactivity" in so-called "floor clauses". These, which were included by banks in most mortgage loan agreements to place a minimum interest rate that the client had to pay, have prevented Spanish clients from benefiting from the fall in Euribor rates.

Another example came from Austria where the Supreme Court ruled that limiting the rate to zero would be contrary to the law because it would create an imbalance between the parties to the contract: a minimum interest rate was set, but not a maximum - an argument that was also used in Portugal.

Is there any news with the new rules for banking?

The new mortgage credit policy will bring greater clarity as to the characteristics of the contract that the client and bank sign in the loan for housing purchase.

Catarina Monteiro Pires (lawyer) explained: "In Part II of the annex to this document the instructions for completing the European Standardized Information Sheet are described, and in this section it is stated that section 3 on the main characteristics of the loan , "Shall specify whether the nominal rate is fixed or variable and, if applicable, the period or periods during which the periodicity of the subsequent revisions shall remain fixed and the existence of limits on the variation of the TAN, such as the ceilings or ceilings".