Mortgage Moratorium – What is it, definition and concept

A mortgage moratorium is an offer by the bank to a customer to defer mortgage payments for a specified period of time. The moratorium is always subject to a series of circumstances that affect the client’s ability to pay.

A mortgage moratorium is an offer a bank makes to a customer, in which he is allowed to defer payment of the mortgage instalments. This postponement is subject to the establishment of a determined term that the moratorium will last, as well as certain conditions. The moratorium, therefore, allows the client to postpone the payment of the mortgage instalment due to an unexpected situation that affects the client’s ability to pay. To measure the situation, it is necessary to meet a series of requirements that determine whether the moratorium is acceptable or not.

Due to force majeure causes, the moratorium can also be promoted by a Government, as well as the relevant economic authority. In other words, if there are pandemic situations or sudden activity stoppages due to natural disasters, the Government can approve the mortgage moratorium for the affected citizens.

Difference between mortgage moratorium and mortgage defaults

Mortgage shortage and mortgage moratorium are very similar concepts. However, between the two concepts, there are a number of differences. Both concepts refer to the payment of a mortgage due to the inability to bear the costs. However, between the deficiency and the moratorium, there are differences as we will see below.

In the first place, the mortgage shortage consists of the deferment of the payment of the mortgage instalment in the face of an unexpected situation that affects the client’s ability to pay. In this way, the debt is restructured and the client can deal with the debt in a more flexible way. However, in the mortgage deficit, the payment of the instalment can be done in two ways:

  • Total mortgage shortfall: Where we would stop paying the principal fee, as well as interest, for a previously agreed period of time.
  • Partial mortgage shortfall: Where we would not return the capital owed to the bank, but we would have to pay the interest generated.

On the other hand, we have the mortgage moratorium. This, like the mortgage deficit, is a deferment of the payment of the mortgage instalment for a previously agreed upon period. However, in the mortgage moratorium, the payment is no longer paid, as well as the interest generated by this moratorium. That is, no interest is paid for the deferment. To do this, it requires certain requirements that, as we will see below, place the client involved in a scenario of economic and social vulnerability.

Requirements to apply for a mortgage moratorium

Depending on the country in which you live, as well as the bank with which you work, there are a series of requirements established as admission criteria for the approval of the mortgage moratorium application.

In Spain, the existing criteria for requesting it are collected by the bank, as well as, if required, by the relevant government body.

In accordance with the code of good banking practices, to apply for a mortgage moratorium the following requirements must be met:

  • The mortgage must be that of the first family home.
  • The client has lost his job or has suffered salary reductions that prevent him from continuing to pay the mortgage payment.
  • The income of the family unit must not exceed three times the Public Indicator of Multiple Effects Income, commonly known as IPREM.
  • The family unit must have suffered alterations in its economic level that significantly modify – downwards – its ability to pay.
  • The mortgage payment must exceed 50% of the total income generated by the family unit.

Although these are the basic criteria, there are always exceptions. Therefore, it is recommended that those who wish to apply for a mortgage moratorium, previously go to their bank so that it informs them about the situation and the existing possibilities.

Why is there a mortgage moratorium?

As we said before, the mortgage moratorium is mainly due to possible alterations that modify a client’s ability to pay and, therefore, prevent him from facing the mortgage payment. However, there are many exceptions where a bank can offer a customer bank default.

In situations of force majeure, the mortgage moratorium applied by a Government has the same effects as if the bank accepted it. A total or partial stoppage of economic activity, either due to possible natural disasters or pandemics, could force banks to accept the mortgage moratorium, lowering the requirements stipulated and cited above.