Mortgage credit agreement definition and the role of the CSSF
A “mortgage credit agreement” is an agreement where a creditor (in principle a bank) grants a credit to a borrower in view of the acquisition of an immovable property.
Credit agreements relating to residential immovable property are regulated by Chapter 6, Book 2, Title 2, of the Consumer Code which was introduced into the Consumer Code by a Law of 23 December 2016 on credit agreements for consumers relating to residential immovable property. The CSSF is in charge of the application and execution of this law.
The CSSF has also been granted a mission of dissemination of clear and general information on the credit granting process in order to guide consumers, especially those who sign a mortgage credit agreement for the first time.
Persons concerned by mortgage credit agreements referred to in the Consumer Code
Persons concerned by mortgage credit agreements referred to in the Consumer Code are:
- consumers,
- creditors and
- mortgage credit intermediaries (cited by way of reminder).
Pursuant to the Consumer Code, these different persons have rights and obligations when they sign a mortgage credit agreement and even before signing the said contract, during a phase to be qualified as the “pre-contractual” phase of the credit agreement.
Pre-contractual phase
Information needed to be given to the consumer by the creditor
Before concluding a mortgage credit agreement, the creditor must provide the consumer with personalised information needed by the consumer to compare the credits that are available on the market, assess the implications of the credits and make an informed decision on whether to conclude a mortgage credit agreement.
This information is,, in particular provided to the consumer by means of the European Standardised Information Sheet (designated hereafter by “ESIS”).
In particular, this ESIS includes information related to:
- the essential characteristics of the mortgage credit agreement (for example : amount and duration);
- the interest rate;
- the frequency and amount of the regular repayment instalments.
The creditor must provide the consumer with a copy of the draft mortgage credit agreement on paper or on an other durable medium.
Assessment of the consumer’s creditworthiness
Before concluding a mortgage credit agreement, the creditor shall thoroughly assess the consumer’s creditworthiness. In this respect, the creditor must make sure that the borrower will have sufficient financial means in order to repay the credit.
The creditor who wishes to assess the borrower’s financing capacity can ask her/him to be provided with all information that the creditor needs, in particular, in order to assess the borrower’s income and expenses. The creditor will be able to have a look at the borrower’s financial commitments and also be able to refer to economic and financial criteria in the borrower’s creditworthiness’ assessment.
The consumer must provide the creditor with all the information needed in order to assess her/his creditworthiness. The creditor will refuse to grant the requested credit if the consumer does not provide the information or verification elements needed in order to proceed with the assessment of her/his creditworthiness. In case the borrower’s creditworthiness is not guaranteed, the creditor must refuse to grant the requested credit. Where the credit application is rejected, the creditor shall inform the consumer, without delay, of this rejection.
Often, the creditor will ask that a mortgage be registered on the immovable property that will be financed by the credit. The mortgage is a guarantee for the creditor to recover all or part of the money borrowed to buy the immovable property, via the forced sale of the property.
Type of interest rate
Mortgage credit agreements can be concluded with a fixed interest rate or a variable interest rate.
Fixed interest rate
The fixed interest rate is a rate that will not vary depending on the credit agreement’s duration.
The fixed interest rate allows the consumer to know from the beginning the amount of monthly installments s/he will have to pay to her/his creditor. Thus, the consumer is protected against a potential increase in interest rates. However, if there is a decrease in interest rates, the consumer who has concluded a credit agreement with a fixed interest rate will not benefit from the decrease in interest rates.
Variable interest rate
The variable interest rate is a rate that varies upwards or downwards during the duration of the credit agreement.
The variable interest rate allows consumers to benefit from a decrease in interest rates. However, if there is a increase in interest rates, the consumer who has concluded a credit agreement with a variable interest rate will have to pay higher interest rates.
N.B. The consumer can also benefit from a mortgage credit agreement where the fixed rate is combined with a variable rate.
Examples:
- a mortgage credit agreement concluded for a total period of 20 years foreseeing a fixed rate for 15 years and a variable rate for the 5 remaining years of the credit agreement ; or
- a mortgage credit agreement for which ¾ of the amount to be borrowed is subjected to a fixed rate and ¼ of the amount to be borrowed is subjected to a variable rate.
Reflection period of 14 calendar days in favour of the consumer
The consumer shall have a reflection period of 14 calendar days during which the conditions of the offer shall remain binding on the creditor.
The reflection period shall be clearly indicated in the ESIS. It shall start on the day the consumer receives the offer from the creditor.
Early repayment
Early repayment right
At any time, the consumer has the right to repay fully or partially her/his mortgage credit before the time fixed in the agreement. In this case, we talk about the right of early repayment of the credit.
Early repayment procedure
When a consumer wishes to proceed with an early repayment of her/his mortgage credit, the consumer shall notify her/his intention to the creditor on paper or on another durable medium.
The creditor shall provide the consumer without delay, on paper or on durable medium, with the information necessary to consider that option.
Compensation to be paid to the creditor in case of early repayment
In the event of an early repayment of the mortgage credit by the consumer, the creditor is entitled to a compensation of early repayment.
The compensation of early repayment shall be a fair and objectively justified by the incurred costs directly linked to the repayment of the credit. This compensation may not exceed the financial loss of the creditor.
Warning : the law foresees a ceiling for the amount of the compensation of early repayment to be paid only in cases where the consumer signed a credit agreement in order to acquire a home:
- which was used as effective and main residence by the consumer
- for a period of at least two consecutive years.
When these two conditions are both (cumulatively) fulfilled, the compensation of early repayment may not exceed the value corresponding to six months of interests on the capital repaid (during each early repayment), calculated at the borrowing rate applicable to the mortgage credit agreement on the day of the early repayment.
It is to be noted that this ceiling to be paid for a compensation of early repayment referred to in the Consumer Code shall not apply to the fraction of the aggregate amount of early repayment(s) which exceeds EUR 450,000.
The need of drawing up a financial plan
It is preferable that the person who wishes to borrow money in view of buying a residential property first of all draws up a financial plan. This financing plan gives the consumer an overview of the financing of the property project. The financing plan takes into account the cost of the constitutive elements of the property project (expenses) and the different means of financing (resources) available to the consumer. Thus the financial plan helps to determine the amount to be borrowed.
Model of a financial plan :
| EXPENSES | Amount | RESOURCES | Amount |
| Purchased price | Own contribution (own capital) | ||
| Potential renovation work costs | Potential support | ||
| Notary fees | Others | ||
| Insurances | |||
| Others |
Amount to be borrowed = total of Expenses – total of Resources
Expenses related to a mortgage credit
The consumer who wishes a mortgage credit should have a clear view of the expenses that s/he will face when s/he will realise her/his property project.
In this respect, the consumer will, in particular, have to consider, as the case may be, the following expenses if s/he does not wish to have bad surprises and risk to have to face a situation of over-indebtedness:
- purchase price of the property or the land;
- potential renovation work costs (for example heating work or sanitary, new roof etc.);
- mortgage credit interests;
- notary fees (including: 1) registration and recording fees amounting to 7% of the purchase price; 2) mortgage agreement fees et 3) notary fees);
- mortgage arrangement fees for the creditor;
- Insurances [in particular repayment insurance which is a form of a risk insurance, the main goal of which is to cover a mortgage debt (outstanding balance of the mortgage credit). In the event of the death of the insured party, the insured capital (capital with decreasing amount) will be reimbursed to the beneficiary (the bank). The aim is to protect the insured party’s family from financial hardship.
Guarantees required by the creditor
In most cases, creditors require a first mortgage registration on the building or the plot to be financed, as well as a wage assignment.
Other guarantees can be required by the creditors such as:
- mortgage on an other immovable property;
- guarantee from a third party;
- pledges of assets;
- state guarantee.
Out-of-court dispute resolution
The CSSF is competent in order to facilitate the out-of-court resolution of a dispute between a consumer and a creditor (or a mortgage credit intermediary) in case of a dispute concerning mortgage credit agreement.
Mandatory nature of the provisions of the Consumer Code with regard to mortgage credit agreements and applicable sanctions
The provisions of the Consumer Code with regard to mortgage credit agreements are mandatory which means that parties can not foresee terms that are in contradiction with what is foreseen by the provision of the Consumer Code.
The CSSF may impose to the creditor which do not respect the provisions of the Consumer Code with regard to mortgage credit agreements the following sanctions:
- a warning;
- a reprimand;
- an administrative fine;
- a prohibition to carry out its profession.
The CSSF may disclose on its website any sanctions imposed.
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Mortgage Credit Agreement
A "mortgage credit agreement" is an agreement where a creditor, typically a bank, grants credit to a borrower for the purpose of acquiring an immovable property, such as a house or land. This type of agreement is regulated by Chapter 6, Book 2, Title 2 of the Consumer Code, which was introduced by a Law of 23 December 2016 on credit agreements for consumers relating to residential immovable property [[1]].
Role of the CSSF
The CSSF (Commission de Surveillance du Secteur Financier) is the authority responsible for the application and execution of the law governing credit agreements for consumers relating to residential immovable property. In addition to its regulatory role, the CSSF also has a mission to disseminate clear and general information on the credit granting process, particularly to guide consumers who are signing a mortgage credit agreement for the first time [[1]].
Persons Concerned by Mortgage Credit Agreements
According to the Consumer Code, the persons concerned by mortgage credit agreements are consumers, creditors (such as banks), and mortgage credit intermediaries. These individuals have rights and obligations when signing a mortgage credit agreement, even during the pre-contractual phase of the agreement [[1]].
Pre-contractual Phase
The pre-contractual phase of a mortgage credit agreement refers to the period before the agreement is signed. During this phase, the creditor is required to provide the consumer with personalized information necessary for comparing available credits, assessing the implications of the credits, and making an informed decision. This information is typically provided through the European Standardised Information Sheet (ESIS), which includes details about the essential characteristics of the mortgage credit agreement, interest rates, and repayment installments. The creditor must also provide a copy of the draft mortgage credit agreement to the consumer on paper or another durable medium [[1]].
Assessment of the Consumer's Creditworthiness
Before entering into a mortgage credit agreement, the creditor is obligated to thoroughly assess the consumer's creditworthiness. This assessment involves ensuring that the borrower has sufficient financial means to repay the credit. The creditor may request information from the borrower regarding their income, expenses, financial commitments, and other relevant criteria. If the borrower fails to provide the necessary information for the creditworthiness assessment, the creditor may refuse to grant the requested credit. In case of rejection, the creditor must inform the consumer promptly [[1]].
Type of Interest Rate
Mortgage credit agreements can be concluded with either a fixed interest rate or a variable interest rate.
Fixed Interest Rate: A fixed interest rate remains constant throughout the duration of the credit agreement. This allows the consumer to know the exact amount of monthly installments they will have to pay from the beginning. However, if there is a decrease in interest rates, the consumer with a fixed interest rate agreement will not benefit from the decrease [[1]].
Variable Interest Rate: A variable interest rate can fluctuate upwards or downwards during the duration of the credit agreement. Consumers with a variable interest rate agreement may benefit from a decrease in interest rates, but they may also have to pay higher interest rates if there is an increase. It is also possible to have a mortgage credit agreement that combines a fixed rate with a variable rate [[1]].
Reflection Period
The consumer has a reflection period of 14 calendar days, starting from the day they receive the offer from the creditor. During this period, the conditions of the offer remain binding on the creditor. The reflection period is intended to give the consumer time to carefully consider the offer before making a decision [[1]].
Early Repayment
The consumer has the right to fully or partially repay their mortgage credit before the agreed-upon time. This is known as the right of early repayment. To exercise this right, the consumer must notify the creditor of their intention in writing or through another durable medium. The creditor is then required to provide the consumer with the necessary information to consider this option. In the event of early repayment, the creditor is entitled to receive compensation, which should be fair and objectively justified by the costs directly linked to the repayment of the credit. The amount of compensation is subject to certain limitations set by the law [[1]].
Financial Plan
It is advisable for individuals who wish to borrow money for buying a residential property to create a financial plan. A financial plan provides an overview of the financing of the property project, taking into account the expenses and available resources. The plan helps determine the amount to be borrowed by subtracting the total expenses from the total resources [[1]].
Expenses Related to a Mortgage Credit
When considering a mortgage credit, consumers should be aware of the expenses they may face. These expenses include the purchase price of the property or land, potential renovation work costs, mortgage credit interests, notary fees, mortgage arrangement fees, and insurance costs. Repayment insurance, in particular, is a form of risk insurance that covers the outstanding balance of the mortgage credit in the event of the insured party's death [[1]].
Guarantees Required by the Creditor
Creditors often require guarantees to secure the mortgage credit. These guarantees may include a first mortgage registration on the property or land to be financed, as well as a wage assignment. Other guarantees, such as mortgages on other immovable properties, guarantees from third parties, pledges of assets, or state guarantees, may also be required by creditors [[1]].
Out-of-court Dispute Resolution
The CSSF plays a role in facilitating the out-of-court resolution of disputes between consumers and creditors or mortgage credit intermediaries regarding mortgage credit agreements. If a dispute arises, the CSSF can be approached to help resolve the issue [[1]].
Mandatory Nature of Consumer Code Provisions and Applicable Sanctions
The provisions of the Consumer Code regarding mortgage credit agreements are mandatory, meaning that parties cannot include terms that contradict the code's provisions. The CSSF has the authority to impose sanctions on creditors who fail to comply with the Consumer Code's provisions. These sanctions can include warnings, reprimands, administrative fines, or even a prohibition on carrying out their profession. The CSSF may also disclose imposed sanctions on its website [[1]].
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