What if you can’t pay the mortgage…

These are difficult times: many UK buyers bought a property before the crisis started and the exchange rates were in their favour. There can be reasons why people have difficulties paying the mortgage: loss of job or income, a divorce or just bad luck. And what will happen if you don’t pay your monthly payments anymore?

Going into denial and hoping your debts won’t catch up with you is a big mistake because it drags out the process, which drives up the final cost to you. All the payments you miss are added to the debt, as are any legal fees the bank incurs, and you start paying a higher penalty interest rate, so your debt will quickly escalate. The longer the process takes, the more expensive it will be for you. And be warned, the penalty interest rate you pay is much higher, potentially over 20%.

The best thing to do is go to the bank before you miss out a payment and serious problems will start. You will find most banks cooperative to find a solution with you, because they’re not interested in expensive and long  repossession procedures either. You could negotiate the payments and/or the conditions with the bank, f.i. you might ask for a longer term (and lower monthly payments) or a period to pay interest only, which might give you some relief until you’re in a better position.

Trying to sell your house before it gets repossessed is another option, but not an easy one in the current market. Remember that if you’re in a repossession procedure, you will get the chance to pay for the outstanding until the very last moment.

In the worst case the bank will reposes your property, through court procedures, and eventually the house will be sold in an auction. But if the auction does not generate enough money to pay for the outstanding plus all legal costs and interests, the bank will go against any other properties you still own, including your income. And remember leaving everything behind and walking away to the UK is not an option as Spanish lenders can and will pursue outstanding mortgage-related debts against assets in the UK.

Banks will sometimes agree to take ownership of a property in return for writing off the mortgage debt under a procedure, established under Spanish law, called “Dación en pago”. This option will normally only be available if there is a decent margin of equity in the underlying property which will allow the bank to sell it on without losing money. Thus for a mortgage struggler with a loan outstanding less than the value of the house, this is an option which draws a line under the episode crucially without any impact on their credit rating in Spain or the UK. Banks are not obliged to accept the proposal but some do rather than face the lengthy and costly repossession route. If the bank accepts this option, they will first have the property valued by their own “tasadora” and you must count on it that their valuation can be lower than you expected.