Mortgage liability is a little known term, but it is important when applying for a mortgage: it is basically a source of information for creditors, banks and credit institutions, who can find out the amount that can be claimed from the debtor. It is also the amount a third party would have to pay (e.g. a guarantor) if the debtor fails to pay their debt. It is also useful, for example, when a financial institution is deciding whether to repossess a debtor's property.
It is also considered in calculating stamp duty (Impuesto de Actos Jurídicos Documentados - IAJD) and notary and registry costs: the smaller the mortgage liability, the lower these costs.
To summarise, it is important, even though it is something we seldom consider when reading the terms and conditions of a mortgage. It is regulated by the principle of unlimited personal liability under article 1911 of Spain's Civil Code.
Does mortgage liability limit liability?
The mortgage liability does not limit the debtor's liability. It simply reflects the maximum debt the customer has arranged. However, their liability for payment is total and unlimited. This means they will have to satisfy this amount from their present and future assets, regardless of the amount.
Mortgage liability limits the liability of potential third parties who were not involved when the mortgage was arranged. For example, if a mortgage is in arrears, the debtor has to pay the outstanding principal and interest, plus late payment and other charges. However, if ownership of the mortgaged property passes to a third party, they could release the property by paying the maximum mortgage liability, or they could allow foreclosure, being liable up to the maximum liability. If the debt is still not settled in these cases, the debtor - not the third party - is liable for the difference.
What if we have several mortgages?
It is useful to redistribute the liability among all of them. We would have to negotiate with the bank to do this, as, for example, if we are going to sell one of the mortgaged properties, it could help us with subrogation, or, on the contrary, it could hamper us, by establishing a minimum sale price.