Mortgages: floor and ceiling clauses
What do both concepts, floor clause and ceiling clause mean, how do they differ and how do they work in relation to mortgages? First, we must clarify how mortgages work at a variable rate. By hiring a mortgage, you will pay a price (interest) for the money the bank lends you. Interest is reviewed once or twice a year in accordance with Euribor. The Euribor is the benchmark index published every day and which indicates the average interest rate at which financial institutions lend money to each other in the banking market.
The floor clause and the roof clause are the limits that are established with respect to the variable interests agreed in the mortgage. That is, in the mortgage loan contract it is agreed that a minimum and maximum percentage that may not transfer interest. Thus, the ground clause assures the banking entity that you will pay a minimum of interest and the ceiling clause guarantees that you will not pay more than a certain sum of interest if these will rise.
Legality of the floor and ceiling clauses
Roof clauses and floor clauses are legal since they do not contradict anything that the law dictates. However, so far no ground clause had resisted the examination of the highest Spanish judicial instance. Surely you had already heard of sentences by abusive clauses. Based on what is established by the jurisprudence of various courts, they are illegal when they are abusive and financial institutions have not reported their existence and their characteristics.
The judicial criterion to consider when a clause is not sufficiently transparent and must be declared void, as abusive, was set by the Supreme Court in its May 2013 ruling. It declared null and void all clauses analyzed for lack of transparency:
- They give the appearance that the mortgage is of variable interest and that whenever the Euribor falls, the fee will be cheaper.
- Do not clarify that the land is a central and defining part of the contract.
- Present the floor as consideration for a roof clause.
- They are located among a large amount of data that mask the clause.
- Do not include simulations of how the variation of the Euribor will affect the fee that the customer will pay.
- Do not notice their cost compared to other products.
In these cases we can talk about the clauses being illegal, since banks and savings banks must inform you of the existing clauses with all necessary and available information. Financial institutions are obliged to report all aspects related to the clauses and with all the necessary explanations.
Do you think the clauses you have agreed to are abusive?
There are already many people who have gone to court to eliminate the roof clause and have succeeded. It was for two fundamental reasons, the disinformation on the part of the bank to the client and for the excessive amount of money to pay for the floor and the ceiling, in which only the bank benefits.
When to hire the floor and ceiling clauses?
Today, interest rates are quite low, compared to 2008 when they suffered a large increase that made it impossible for many people to pay their mortgage fee. In this case, it would be advisable to ask the bank to establish a ceiling clause to avoid increases in the Euribor. However, in this case the bank will also impose a ground clause, so that a minimum interest is ensured.
In conclusion, the roof clause is worth it if you want to buy a house or a house and think about applying for a long-term variable interest mortgage, for example, 20 or 30 years. At that time the interests can go up and down without control. In this case it makes sense, to be sure and to avoid being affected by the Euribor rises, to have agreed interest clauses.
On the contrary, if the mortgage you wish to contract is short term, you should evaluate whether it is better to contract it without floor or ceiling clauses, since it is not expected that there will be a sharp rise in short-term interest rates.