With the disappearance this year of Libor (a benchmark used for loans in currencies other than the euro), the future of multi-currency mortgages is uncertain. These types of credits associated with foreign currencies must now be linked to an alternative benchmark. Otherwise, as stated by the Bank of Spain “these mortgages will lose the reference to calculate in the periodic reviews the interest rate to be applied and, therefore, the installments cannot be determined”.
Problems associated with multi-currency mortgages
In Spain there are about 70,000 people with multi-currency mortgages. They are loans to buy homes granted in a currency other than the euro, such as Swiss francs or yen.
They began to be popular when the Euribor was around 4%. Banks offered these products associated with foreign currencies with a benchmark that allowed them to pay a lower fee.
The problem arose when the value of these currencies rose and so did the benchmark index to which they were linked: Libor. The fees began to be higher and the outstanding capital to be paid was also altered. In some cases, even the value of the mortgaged home was not enough to pay off the debt.
In September 2017, the Court of Justice of the European Union issued a ruling declaring multi-currency mortgages abusive when their subscribers were not informed of the risks they had. A month later the Supreme Court declared one of these products illegal because the entity did not explain to the client what the consequences would be if the interest rate of the loan currency rose.
Libor
In 2012 Barclays was fined by the British authorities for falsifying this interest rate between 2005 and 2009, thus making it clear that the libor was easily manipulated. Other entities were investigated for the same reason.
Ten years later, this index has disappeared and many multi-currency mortgages will have to be reviewed with another: the Euribor or the IRPH. If the loan agreement establishes the substitute rate, the problem is solved.
If not, it is necessary to reach an agreement with the bank to set the new reference.
What to do if the bank has not yet contacted me?
If this is your case, the first thing you should do is request information from your bank. The Bank of Spain advises that these aspects be taken into account:
- The expenses associated with the index change.
- Request information on the proposed alternative index: composition, historical evolution and associated risks.
- The reason why they propose this index and to what extent the conditions they offer you will not harm you.
- Find out the variation of the quota in different scenarios of evolution of the reference index.
- See if the offer involves any other commitment or any changes in the terms of your loan.
If the proposal is to move from a variable loan to a fixed rate, take into account: the amount of the fee, the associated expenses or the commitments that the change will bring.
In October, the European Commission ruled that Libor-referenced mortgages in Swiss francs should replace the index with SARON.