The 'fine print' of ICO guarantees: why will it make mortgages more expensive… and what happens if I end up defaulting with the bank?

The Government has approved the creation of a line of guarantees through the Official Credit Institute (ICO) to guarantee 20% of the mortgage of a first home for people under 35 years of age and families with dependent children.

The objective pursued by the Executive with this initiative is to save “that insurmountable wall called 'entrance' for so many young people and families with minors, who will finally be able to access the purchase of decent housing without having to depend on the continuous fluctuations of the volatile rental market.

Because in Spain when a person goes to a bank to request a mortgage to buy a home, the normal thing is that the entity only grants 80% of the total price of the property. That means that the buyer must contribute the remaining 20%.

For example, for a house of 200,000 euros, the bank would give you a mortgage loan of up to 160,000 euros, with which the buyer should have saved the remaining 40,000 euros. Now, people who meet the required requirements will be able to obtain the remaining 40,000 thanks to the support of the State. But what is a guarantee? How does it work? What does it mean for the buyer? Below we answer some of the doubts that may arise about the figure of the guarantee.

What is an endorsement?

It is basically a payment guarantee that covers the possible non-payment of a debt. In this case, the State becomes the guarantor and will therefore be responsible to the bank for the applicant for the guarantee in the event that the latter cannot make the agreed payment.

How is it granted?

The normal thing is that the interested party goes to request the guarantee from his usual bank, which after a previous study of his financial situation (income, debts, assets…) will decide whether to grant it or not.. If so, the bank undertakes to pay a certain amount if the guaranteed does not do so and charges commissions, depending on the term, type and risk of the guarantee.

What does it mean for the buyer?

In practice, it allows the buyer to access financing that would otherwise be available.. With the guarantee of the Government, the beneficiaries will be able to finance 100% of the purchase of their home with the bank. This means, on the one hand, that the buyer should not wait until they have that 20% of the down payment to be able to purchase their home; but, on the other hand, it also entails greater indebtedness and higher installments as the bank finances 100% of the property and not 80%.

What types of guarantees are there?

The most frequent guarantees are bank guarantees and there are two types (financial and technical). The most demanded are related to housing rentals. In these cases, the landlord asks the tenant for a guarantee corresponding to a certain number of monthly payments to ensure their payment in case the tenant does not do so.

Can only banks guarantee?

No. There are also so-called personal guarantees. This guarantee is issued by a natural or legal person who undertakes to pay a debt in the event that the main debtor defaults on it.. “In this type of guarantee, the guaranteed party does not receive any amount for granting the guarantee, which, however, responds with all its present and future assets, with the implicit risk that it entails for the guarantor,” says the specialized firm Navas & Cusí

Are personal guarantees frequent?

When someone does not want to go to the bank, it is not uncommon for them to ask a relative for help to act as guarantor. This is what happened in many cases during the real estate boom that took place in Spain between 1997 and 2007 until the bubble burst in 2008 and the economic crisis that broke out led many families to lose their homes and those of their children because they did not They were able to meet the mortgage payments.

What if I can't pay?

That the guarantor must face the payments. In the case of the holder or holders of a mortgage guaranteed by the ICO, it is most likely that the state body will be in charge of returning the 20% guaranteed to the bank, but not for the rest of the debt. Subsequently, the ICO will claim the amounts that have been paid from the guarantor.

Why do you have to request the guarantee through the ICO?

The ICO is a public entity under the Ministry of Economic Affairs and Digital Transformation that provides SMEs, the self-employed and companies with headquarters in Spain access to a series of financing lines with which to alleviate their lack of liquidity.

Now it will also have the mission of assisting individuals in matters related to the purchase of their first home. As it appears on its website, “it is financed in the national and international markets” and “the debts and obligations it contracts enjoy the explicit, irrevocable, unconditional and direct guarantee of the Spanish State before third parties”.

Where can it be applied for?

Potential beneficiaries may request the guarantee, which does not have any additional cost, through the financial entities that operate in the ICO financing lines.

This is the usual operation in communities where similar aid already exists, such as Galicia, Madrid, Murcia and Castilla y León. The period to apply for this aid will end on December 31, 2025, although there is the possibility of extending the measure for two more years.

Who can benefit from guarantees?

The population groups that may receive this aid are young people up to 35 years of age and families with dependent minors without an age limit for parents with gross income of up to 37,800 euros per year (4.5 times the IPREM).. In the event that the home is purchased by two people, the limit will double, that is, up to 75,600 euros.

However, these conditions can improve depending on the number of children and whether the family is single-parent. Thus, the income limit will increase by 2,520 euros gross per year for each dependent minor and, in the event that there is only one parent, the limit may be increased by an additional 70%.

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