What is a mortgage floor?
A mortgage floor is a clause that sets a minimum interest rate when the Euribor is low. In variable-rate mortgages, repayments vary depending on the Euribor and the agreed spread. When the sum of these falls below a stipulated threshold, the minimum percentage set in the floor clause is applied.
There are therefore two possible scenarios:
- If the agreed interest rate (Euribor + spread) is below the interest rate floor, the bank may charge the floor interest rate.
- If the agreed interest rate is higher than the floor, you pay the agreed interest rate.
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Just as there is a floor for paying a minimum, there is also a ceiling or maximum interest rate. If the contractual interest rate exceeds the ceiling, you never pay more than that limit.
This is easier to understand with an example:
A customer has a mortgage with a 2% floor clause. In other words, 2% is the minimum rate the customer will pay, regardless of what happens to the Euribor. If the sum of the Euribor and the spread is 1%, the customer will still pay 2%, because that is the agreed minimum percentage.
If the sum of the Euribor and the spread is 3%, this clause would not apply and the customer would pay the contractual interest rate of 3%.
This clause started to be applied by some entities in Spain when the Euribor fell considerably. You need to review the deed for a mortgage loan to find out whether the mortgage has a floor clause, specifically whether it establishes that the interest rate cannot be less than a certain percentage.
The use of floor clauses in sales contracts is not permitted at present.