The infamous “ground clause” or “cláusula suelo” – a minimum interest rate that financial institutions applied to many mortgages in order to insulate themselves from possible declines in the Euribor – has caused loans taken before the crisis to increase, in some cases, from anywhere between 1,000 and 5,000 euros.

During the era of the property boom, many home buyers were unaware this clause was included in their contract when they signed for a new mortgage.

The nasty surprise for the mortgage holders came when the Euribor, the interest rate which 90% of mortgages in Spain are based on, started to decline in 2009 to below 2%, and these reductions were not reflected in the loan payments.

The reason for this is that their mortgage contract stipulated a minimum interest rate they were obliged to pay even though the Euribor plus their differential was lower.

These limits imposed by banks are between 2.50% and 5.50%, but for 27 months the Euribor has run below the 2.50% level, and in fact reached a record low in March 2010 of 1.215% . This means that many families ‘tied’ to the ground clause have not benefited from this drop in the mortgage rate.

It is estimated that there are currently about four million mortgages in Spain which contain this clause. It is only when the Euribor plus the differential drops lower than the minimum interest rate that the ground clause is applied. However, if the Euribor and the differential go over this minimum rate, then the financial institution uses the combination variable interest rate. Thus the bank always charges the highest interest rate whatever happens with the Euribor.

This practice is considered legal but abusive, and in recent months courts and consumer associations have made some progress and passed judgments against banks over gains they have made in recent years while mortgage holders lost money.

According to calculations made by one personal finance specialist, this ground clause has resulted in mortgages signed in 2007 increasing between 1,000 and 5,000 euros.

The study is based on a mortgage signed in 2007 of 150,000 euros over a 30 year term and reviewed annually. Applying the conditions of some existing mortgages, it calculates how much the monthly payments would be without the ground rule. The differences monthly ranged from 68 euros to 256 euros.

For example, ‘HipotecaNet de Caja España’, is one of the cheapest mortgage providers in the market with a spread of 0.35%. However, their contract has a “ground clause” of 2.50%. The monthly payment amounts to 592 euros, but if the contract was free of this clause, the payment would be reduced to 524 euros. Thus, the total paid since 2007 with this clause amounts to 36,570 euros, while without the clause the total would be 35,560 euros, which represents 1,010 euros of a difference.

A more extreme example is a mortgage obtained via Banco Popular with a “ground clause” of 5.30%. With a variable interest rate of Euribor + 1.05% this carries a monthly payment of 576 euros, but include the ‘ground clause’ and the payment then rises to 832 euros. That, since 2007, makes a difference of 5,251 euros.

The opposition of customers to the ground clause and the increase of related court cases, has resulted in many institutions now offering mortgages ground clause-free.

Some of the best mortgages currently on the market now include a differential of less than 0.50%. However, before signing any mortgage you should make sure you know what clauses apply and where any limits are fixed – and be aware that sometimes the bank will not mention the ground clause. Several other factors should be considered aside from the spread when choosing your mortgage, as commissions and other related costs can add to the final value of the loan.