A tribunal of the Spanish Supreme court recently ruled that banks, not borrowers should pay the tax incurred by notarising and inscribing a mortgage deed, overturning a previous ruling in the opposite direction. Though apparently good news for borrowers, this ruling has left the highest court in the land at sixes and sevens, and plunged the Spanish mortgage market into confusion, with negative implications for the housing market.
For the past 23 years, it has been the norm in Spain for borrowers to pay the Stamp Duty tax on mortgages, know as Actos Jurídicos Documentados (AJD), a tax made up of a fixed and variable cost determined by autonomous regions. Typically the cost varies between 0.5% and 1.5% of the total value of the mortgage, including costs and interest payments, meaning the taxable value is considerably higher than the face value of the mortgage. To give you an example, a mortgage with a face value of €100,000 could cost anything between €675 and €3,000 in AJD, depending up the region. This is a big expense for mortgage borrowers, and there’s a lot of money at stake.
Back in December 2015, a civil tribunal of the Supreme Court ruled for the first time that banks should pay the Stamp Duty on mortgages because they are “the principal interested party in the inscription of the mortgage guarantee.” This was then followed by a series of contradictory rulings from different tribunals of the Supreme Court, creating legal insecurity that the latest ruling was supposed to clear up.
It did not. On the 18th October, when news of the latest ruling broke, Spanish bank stocks took a beating in the market, and a picture emerged of confusion and incompetence in the management of the Supreme Court, with the president of the tribunal finding out about the decision on the news. A controversial decision was taken by him without consultation to suspend all pending cases relating to payment of AJD until after a plenary session of the court scheduled for the 5th of November. It looks like the judicial authorities are preparing to reverse the decision, which angered the judges who made it. It also looks like pandering to the banking lobby, and it’s far from clear if the plenary session will revise the doctrine or simply clarify the details of how it is implemented without overturning the principle that lenders should pay. The reputation of the Supreme Court has been damaged, and the result is more uncertainty and confusing than before.
So it’s not clear for now who will end up paying the AJD tax, and, if it’s lenders, if the decision will be retroactive or not. If it does turn out to be retroactive, it will trigger a huge number of claims that will further clog up the inefficient judicial system, as Spain is good at establishing the right to claim whilst making it hard, long, and expensive to do so. In the meantime the mortgage market is beset by increased uncertainty as the final decision will have a big impact on all involved. House buyers with binding mortgage offers are being urged to complete as terms will not be so good if the final decision goes against lenders. No doubt many lending decisions are being put on hold until after the 5th of November, with implications for the property market. Whatever the final decision, you can be sure that borrowers will pay one way or another, either through Stamp Duty or with more expensive mortgage terms.