“Beware of Risks: Important Considerations for Young Homebuyers Utilizing ICO Guarantees”

They must take into account that the mortgage payment must not exceed 30% of their income and anticipate the volatility of interest rates.

On May 9, 2023, the Council of Ministers, at the proposal of the Ministry of Transport, Mobility and Urban Agenda, approved a “new line of ICO guarantees” in order to facilitate access to housing for young people and families with minors. According to official calculations, through these guarantees, it is intended to promote the acquisition of approximately 50,000 homes.

The Navas&Cusí law firm, specialized in financial and tax law, warns of the threats that hang over the holders of these credits “with ICO guarantee” if they do not take into account certain aspects when signing their mortgage, such as that the monthly payment does not exceed 30% of your income.

Juan Ignacio Navas, managing partner of N&C, says that “first of all, it should be remembered that all financing operations must be accompanied by a “risk analysis” and the “real capacity of the borrowers to meet the payments of the loan”. The mortgage payment should not consume more than 33% of the total income of the family unit. After the sharp rise in rates in 2022, with the invasion of Ukraine, debtors in a situation of vulnerability are considered those whose mortgage payment exceeds 50% of total income.

A second important aspect is that “easy access to a public guarantee will in no way imply a reduction in the financial resources to be used in the acquisition of the property. The payroll or pension of the borrowers will remain intact. The guarantee, let’s make it clear, does not add or take anything away from the operation, since the obligation to repay the loan (with its respective interest) remains the same, with and without a guarantee”.

After the real estate crisis of 2008, one of the basic rules of financial prudence of the Bank of Spain has been to limit access to financing, at most, up to 80% of the appraisal value of the property. The granting of a guarantee should not exceed this limit.

The mirage of the ease of public guarantees

We must not -says Navas- fall into the mirage that the “ease of public guarantees” transfers us, once again, to scenarios of financial irresponsibility. Like the rest of the borrowers, each month the payment of an installment will accrue (the first year fixed and the following years probably variable subject to the volatility of interest rates)”

The Government’s announcement says nothing about the rates applicable to these operations (fixed, variable, mixed), which is why it will be the private financial entity that establishes them. The ICO guarantee is valid for 10 years, an average loan is usually set at about 20/25 years. For this reason, the borrower has to think about how to deal with the obligations for the rest of the remaining 10 or 15 years.

Nor is it alluded to in the government announcement about the true “distribution of guarantees”.

Together with the mortgage, that is, the real charge, the ICO is presented as guarantor or guarantor of 20% of the capital. In the fine print of the loan, there is no reference to the existence or not of additional guarantees (or their joint and several nature or not). On many occasions, especially taking into account the income limits to access such guarantees, the first mortgage loan is usually guaranteed by the parents of the borrowers.

In this sense, we are still remembering the previous line of ICO guarantees (COVID 19 guarantees for entrepreneurs and the self-employed) in which, supposedly 80/20, that is, the ICO was going to assume the guarantee of 80% of the principal and 20% would be assumed by the entity. Unfortunately, and this has been revealed by the Court of Auditors in its audit report for the year 2020 of the COVID19 guarantees, contrary to the official advertising 80/20, many of these guarantees were signed with “personal solidarity guarantee” from the Administrators or partners of borrowing companies.

It would be unforgivable if, once again, the same errors were reproduced by incorporating “other guarantors” into the loan signature without knowing the scope or real limits of their personal guarantee commitment.

Juan Ignacio Navas finally adds that “with these precautions and warnings, before even receiving any type of pre-contractual offer from financial institutions, my advice is to put yourself in the hands of experts in Banking Law in order to advise you throughout the process until where appropriate, the signing of the loan”.