Mortgage-linked insurance: what the bank can require

Mortgage-linked insurance in Spain means products the bank may present alongside the loan, but Article 17 of Law 5/2019 bans imposing tied sales except for exceptions. This guide separates required insurance, equivalent alternative policies, combined offers and comparison by APRC and total cost.

What is a tied sale and why is it banned?

A tied sale is a package in which the loan is not offered separately, and the general rule is that it is banned. The LCCI defines a "tying practice" (tied sale) (art. 4.25) as any offer or sale of a package made up of the loan and other distinct financial products or services when the loan is not offered separately.

Article 17.1 is categorical: "Tying practices for loans are prohibited, with the exceptions provided for in this article." The general rule, therefore, is the ban; the exceptions are closed and are set out below.

The consequence of breaching it is nullity. Article 17.2 provides that any contract linked to the loan that, to the borrower's detriment, fails to meet the article's requirements is void. It is a partial nullity: the law makes clear that the nullity of clauses affecting linked products does not entail the nullity of the loan. Put another way, if the bank improperly imposed a product on you, that product falls away, not your mortgage.

What insurance can the bank require?

The bank can require the insurance allowed by Article 17.3 as an exception to the general ban. There are two types:

• Insurance guaranteeing performance of the loan obligations (what the market calls repayment or payment-protection insurance).
• Damage insurance on the mortgaged property and the other insurance provided for in mortgage-market legislation.

These two are the only category the law allows to be imposed as a condition of the loan. Alongside them, Article 14.1.f) requires the bank to give you in writing the conditions of the insurance cover it requires, so you know exactly what cover is being asked of you before signing.

Can you bring your own policy?

Yes: the bank being able to require that insurance does not mean it can force you to take it out with it or with the insurer it chooses. Article 17.3 imposes three cumulative safeguards in your favour:

• Accept equivalent alternative policies. The lender "must accept alternative policies from all providers offering conditions and a level of cover equivalent" to the one it had proposed. You can take the insurance out with any insurer as long as the cover is equivalent.
• No charge for reviewing your policy. The bank "may not charge any fee or cost for reviewing the alternative policies" you present.
• No worsening of the loan. Accepting an alternative policy different from its own "may not entail any worsening of the loan conditions of any kind".

And this right does not run out at signing: the law states that the bank must accept equivalent alternatives "both at the initial subscription and at each of the renewals". So each year, when the insurance renews, you can compare again and switch insurer without it affecting your mortgage.

The practical key is the concept of equivalence: the alternative policy must offer conditions and a level of cover equivalent to the one proposed by the bank. Keep a written comparison of the cover to prove that equivalence if the bank raises objections.

How do combined offers and rate discounts work?

Combined offers work as packages in which the loan is also offered separately, which makes them different from tied sales. A combined (bundled) offer (art. 4.26) is a package with the loan and other products when the loan is also offered separately; Article 17.6 allows these "within the limits set out in this article".

Article 17.7 sets those limits. In combined practices the lender must make the offer of the products both combined and separately, so you can see the differences between one and the other. Before you contract, it must inform you expressly and clearly of: that it is a combined product; the benefit and risks of loss (with simulated scenarios for investment products); the share of the total cost that corresponds to each product; the effects that not taking a product individually or early cancellation would have on the combined cost; and the differences between the combined offer and the products offered separately.

How should you compare using the APRC and total cost?

Compare using the APRC or total cost, not only the nominal rate (TIN). When insurance is a condition of the loan — because it is required (art. 17.3) or because it is part of a combined offer whose cost must be broken down (art. 17.7) — its premium counts towards the total cost of the credit and therefore towards the APRC (TAE; commonly APR).

The legal chain is this: Article 4.12 of the LCCI defines the "total cost of the credit" by referring to Law 16/2011 of 24 June, on consumer credit agreements, whose Article 6.a) expressly includes "the cost of ancillary services relating to the credit agreement, in particular insurance premiums, [...] if obtaining the credit on the terms offered is conditional on entering into the service contract". The APRC, calculated on that total cost, is why it is the figure that lets you compare properly.

The right test is not to compare the nominal rate with insurance against the nominal rate without it, but to compare the APRC (or the total cost) with and without the products. A discounted rate that requires two expensive insurance policies can, overall, work out dearer than a seemingly higher rate with no products.

You can run exactly that comparison in the mortgage calculator: work out the instalment and total cost at the discounted rate and add the annual cost of the insurance, then contrast it with the no-products scenario. To understand why the APR beats the nominal rate, see the guide on the difference between the nominal rate and the APR, and if you are unsure between types, the one on a fixed or variable mortgage.

What happens if you cancel a rate-discount insurance?

If you cancel a rate-discount insurance, the LCCI sets no automatic legal consequence. What happens depends on what your contract and your FEIN agree.

A frequent question: if I stop paying the insurance that gave me the discounted rate, what happens? It is worth being precise: the LCCI does not substantively regulate this effect. No provision sets an automatic legal consequence (such as "recovering the spread" or a penalty). What happens depends on what your contract and your FEIN (the Spanish binding offer document) agree, where the conditions of the discount are set out.

What the law does impose is a prior duty of information. In authorised tying practices, Article 17.5.c) requires the bank to inform you of "the effects that early cancellation of the loan or any of the linked products would produce on the combined cost". In combined offers, Article 17.7.d) requires the same information on the effects of "not taking a product individually or early cancellation" on the combined cost. That is why it is essential to read, before signing, how your FEIN describes the effect of dropping each product.

What happens if the bank breaks the rules?

If the bank breaches Article 17, there may be nullity of the improperly imposed product and an administrative infringement. Imposing a banned tied sale, charging you to review your alternative policy, or worsening the terms because you brought one are breaches of Article 17; besides the nullity of the improperly imposed product (art. 17.2), the conduct can amount to an administrative infringement. The penalty regime is in Article 46 of the LCCI, which classifies infringements as very serious, serious and minor (through the residual route, according to the number of people affected, repetition and effects), and refers for the penalties to Law 10/2014 on the organisation, supervision and solvency of credit institutions.

To complain, the usual path is: first, submit a written complaint to the bank's own Customer Service department (SAC); and if it does not reply within the deadline or the reply does not satisfy you, take it to the Conduct Department of the Bank of Spain. Keep a copy of the FEIN, the contract and the alternative policy you provided: they are proof that you exercised your right.

Frequently asked questions

Can the bank force me to take any insurance?

The bank cannot force you to take any insurance as a condition of the mortgage. Art. 17.3 of Law 5/2019 allows it to require insurance guaranteeing performance of the loan and damage insurance on the mortgaged property, plus the other insurance provided for in mortgage-market legislation.

Can I take the insurance with another insurer?

Yes, you can present an alternative policy from another insurer if it offers equivalent conditions and level of cover. The bank must accept it at signing and at each renewal, may not charge for reviewing it, and may not worsen the loan conditions because it accepts a policy different from its own.

What is the difference between a tied sale and a combined offer?

In a tied sale, the loan is not offered separately, so the general rule in art. 17.1 is prohibition. In a combined offer, the loan is also offered separately; art. 17.6 allows it within limits and art. 17.7 requires a separate offer and a breakdown of costs.

How do I know whether a rate discount is worth it?

To know whether a rate discount is worth it, compare the APRC or total cost with and without products, not only the nominal rate. When insurance is a condition of the loan or part of a combined offer, its premiums count in the total cost of credit through the chain Article 4.12 LCCI and Law 16/2011.

Summary

• A tied sale (forcing you to take another product to get the loan) is banned (art. 17.1); an improperly linked contract is void, but the nullity does not drag down the loan (art. 17.2).
• The exception is repayment/payment-protection insurance and damage insurance on the property (art. 17.3): those it can require.
• You can bring your own equivalent policy, with no charge for reviewing it and no worsening of the loan, at signing and at each renewal.
• "Rate discounts" are combined offers: the bank must also offer you the loan without products and break down the cost of each (art. 17.6-17.7).
• Compare using the APRC / total cost, not the nominal rate: the premiums of required insurance count towards the APRC (art. 4.12 LCCI → Law 16/2011).
• If you cancel a discount product, the effect is set by your contract/FEIN; the LCCI only requires that you be informed beforehand (art. 17.5.c / 17.7.d).

Compare your mortgage cost with and without insurance

Official sources

• Law 5/2019 (LCCI) — art. 17 (tied and combined sales), art. 4 (definitions and total cost of the credit), art. 14 (transparency) and art. 46 (infringements) (BOE, consolidated text).
• Law 16/2011, on consumer credit agreements — art. 6 (total cost of the credit, insurance premiums) (BOE, consolidated text).

Notice: this guide and the calculator are for information and educational purposes. They are not financial, insurance or legal advice, nor a loan offer. The numerical examples are hypothetical and illustrative and do not reflect market premiums or rates. Always check the terms and cover with your bank and your insurer; the lender's FEIN sets out the binding offer and the breakdown of the required or combined products.