“Ground clauses" on a mortgage´s interest rate indicates the level of final interest rate (Euribor plus spread and relevant) to be paid by the client, regardless of the level at which the index is at the time of the review. So even if the index falls to zero, the borrower still pays at least a minimum established interest rate.
The "ground clause" is a permitted and legal condition of the loan if the parties freely agree to it, as are the "roofs" of the mortgage´s interest rate, i.e., the maximum rate that can be paid on a variable interest mortgage.
In any case, for the financial institution to act in accordance with the new law 2 / 2009 of March 31st, the information must be sufficiently clear in accordance with annex 2 of the Order dated May 5th, 1994.
For more information regarding this law:
If you are looking for a mortgage, it is best to choose one that provides the benefits of a falling Euribor, without limiting its descent. This would eliminate the ground level interest rate and provide borrowers with an interest rate based directly on the index.
If you already have a mortgage loan, look under the "Interest rates" paragraph of the (1)binding offer, (2)contract with the Bank and (3)Notary deeds to see if your institution is applying this restriction.
Customers often sign their mortgages without being aware of this clause and learn only when it is applied to them. Then, once the Euribor is falling, they expect that their mortgage payment will decrease sharply upon their next review. It comes as an unpleasant surprise when there is only a modest decrease in their monthly payment. This is because their payments are now based on the ¨ground clauses¨ limit and not directly on the index.
In accordance with Consumer Law it is possible to ask for the removal of these clauses if they have not been freely agreed to by the parties. The burden of proof rests with the Bank: this new era needs to be a pro-consumers one: ordinary people: the weak side of the market which has already proved to be a fierce beast.
By María L. de Castro and Christin Murphy
Christin Murphy is a GMBA Candidate, International Finance in Suffolk University, Boston MA. United States.