Last March, the Government adopted a series of measures, set out in two Royal Decree-laws, aimed at alleviating the economic difficulties that the most disadvantaged people will likely face as a result of the coronavirus crisis.
Among these measures, the possibility was enabled for those who have lost their jobs or seen their income substantially reduced due to circumstances arising from the pandemic to access a three-month moratorium on the payment of their loans, both mortgage and non-mortgage. To determine this possibility, a series of objective parameters were established.
Given the limited scope of the legal moratorium, the member banks of the Spanish Banking Association (AEB) reached a sectoral agreement with the aim of expanding, in terms of both duration and the range of potential beneficiaries, the moratorium established by the Government.
The sectoral moratorium agreed upon by the banks allows individual clients who have been economically affected by a series of unfortunately common circumstances following the COVID-19 crisis to apply for a deferral in the payment of the principal of their loans. The payment deferral may last up to twelve months for mortgage loans and up to six months for personal loans. By mutual agreement, this will result in an extension of the maturity date or an increase in installments during the remaining term, without this implying an increase in the interest rate or any other modification of the originally agreed conditions. In any case, any method of formalizing the deferral must be financially equivalent to said original conditions and may not lead to any type of increase in the cost of the loans for the client.
Last week, the Bank of Spain released data regarding the legislative moratorium. Up to April 30, financial institutions in Spain as a whole have granted more than 120,000 deferrals on outstanding capital exceeding 7.1 billion euros, and have already processed 24% of the applications submitted.
Regarding the sectoral moratorium agreed upon by AEB banks, deferrals have been granted for more than 51,000 loans—45% of the applications submitted—with an outstanding capital of 3.355 billion euros.
Are the figures for the legislative moratorium consistent with those offered by the banks under the sectoral agreement? The answer is necessarily affirmative.
It is first worth clarifying that, according to the terms of the AEB sectoral agreement, accessing the legal moratorium does not prevent affected debtors from also benefiting from the sectorally agreed moratorium once the former has ended, until the maximum term of the latter is completed between the two. It therefore seems reasonable that the number of debtors who wish, as a first option, to obtain a deferral through the legislative moratorium is considerably higher, and also that the approval rate for applications submitted is lower—24% for the legal moratorium compared to 45% for the sectoral one.
This difference is also consistent with the fact that the legal moratorium is limited to debtors in serious economic difficulty, assessed according to strict parameters—requirements that are not demanded, at least not with the same intensity, of the beneficiaries of the sectoral moratorium.
In this same sense, it also seems logical that the loan amounts are higher for those granted under the sectoral moratorium (an average of 114,000 euros in the case of mortgages) than for those covered by the legal moratorium (100,000 euros).
Regarding the economic effect of the moratoriums, the comparison is somewhat more complicated, as the legislative moratorium involves the deferral of the entire monthly installment, but only for three months, while in the sectoral moratorium the payment of the principal is deferred and interest continues to be paid, but the deferral extends up to 12 months in the case of mortgage loans.
Let us consider an example. Let’s take as a reference a home purchase loan whose average amount has been below 120,000 euros over the last fifteen years (one only needs to check the INE statistics to see that the unusually high figure for February, 176,000 euros, is by no means representative), at 1.5% interest (the average rate for active home loans is 1.2% according to data published by the Bank of Spain) and with an initial term of 23 years (the average term according to the Spanish Mortgage Association).
In a mortgage loan such as the one described, if the deferral occurs in the sixth year of the loan’s life (with approximately 100,000 euros of outstanding capital), the sectoral moratorium results in the monthly installments of about 520 euros being significantly reduced and, in round numbers, becoming 130 euros per month during the 12 months of the deferral. Regarding repayment, the maturity can be deferred by 12 months or one can choose to increase the monthly installments during the remaining life of the loan (17 years); in the latter case, the installment increases by 27 euros per month.
Since the beginning of the crisis, Spanish banks have taken on a double commitment. On the one hand, to contribute decisively to alleviating the economic effects of the pandemic, supporting Government measures (such as the legislative moratorium described or the loans with ICO public guarantees) and promoting their own initiatives, of which the sectoral moratorium is just one. On the other hand, and no less importantly, the commitment to promote transparency, making available to their clients and society in general whatever information is required so that the former can make informed decisions and the latter can understand the extent of the efforts made.
Santiago Pernías Solera, advisor to the Spanish Banking Association (AEB)
