What is a “cedula hipotecaria”?

You may have heard about the “cedulas hipotecarias” or covered bonds.

A “Covered Bond” is a financial product guaranteed by the whole mortgage portfolio of the bank itself with an interest linked to it. This is a safe product in a normal economic climate and it could be quite profitable (in fact, during the property boom it brought a lot of investors). But in the current economic climate it does not give any benefit, and it has a big defect: if the investor wants the money back, he will need to sell the Covered Bonds and who would want to buy anything linked to mortgages these days? Nobody!

Therefore, the investor has a problem. He has the money and needs it but he cannot take it. What can he do? Spanish Banks usually offer the following: The bank will take the covered bonds in exchange for a 4 year term deposit account, with low interest and the prohibition of getting the money out during the first year. It does not look like a great investment (except for the bank), but it is a good solution for those investors with this problem.

Prior to signing any agreements, the investor who got trapped in the covered bonds, needs to consider some important issues:

Firstly, he should check all the details of the offer, read all the clauses and seek advice from a professional to avoid being caught in trouble again, and finally compare the options available. Obviously, Banks usually look for themselves and therefore the agreement may not be as attractive for the investor.  The investor should ask for copies of the offer and the contract, take them home and read them carefully.

Of course, most foreign investors will struggle to understand the language and the terminology. It is therefore advisable to seek professional advice from a qualified Spanish lawyer or Economist. If in the end, the investor opts for this agreement with his Spanish bank and he is living in the UK, he will be able to grant power of attorney to either the bank or someone he trusts to sign the necessary paperwork in Spain. As mentioned in previous posts, a power of attorney can be signed in this country without the need to travel to Spain and this could prove helpful to those who do not want to use their holidays just to sign an agreement.

As always, it is better to be safe than sorry so don’t rush into agreements or products until you are entirely sure of what you are signing.

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