Sometimes we have so many things on our minds and we want to do so much that oversights seem inevitable. And it's okay if you forget to buy sugar or wish your aunt a happy birthday, but... does the same happen when the oversight is financial? Well, it depends on the oversight.
Imagine that you fall behind on a mortgage or loan payment or you stop paying it. One of the consequences is that you will have to pay additional interest on that money. This is known as default interest or interest on arrears.
What is late payment interest on a mortgage?
Mortgage late payment interest is the penalty applied when you are late in paying your mortgage instalment. It starts to apply from the first day of delay, that is, from the moment you fail to meet your payment obligation and is a kind of compensation paid to the bank for not meeting the instalments within the agreed period.
When is late payment interest charged?
From the moment the financial institution sends the payment order and your bank rejects it, late payment interest begins to apply.
What is the maximum default interest on a mortgage?
These interests are regulated by law, specifically, Law 5/2019 , regulating real estate credit contracts, establishes that no interest may be charged higher than three percentage points of the remunerative interest.
What does this mean? Basically, this late payment interest on the mortgage cannot be anything more than the result of adding three points to the rate you pay on the mortgage. For example, if your loan has a fixed rate of 2%, the late payment interest cannot exceed 5% per year.
In any case, the mortgage deed will usually reflect the specific interest rate that applies to that loan.
How is late payment interest charged?
Late payment interest is applied to the days of delay and in proportion to the time taken to pay.
There's nothing like an example to help you understand it better. Imagine that your fixed-rate mortgage payment is 2.5% and you're late with the payment for one month. In other words, you leave one month unpaid and pay the full amount the following month. If a different late payment interest had not been agreed, the legal rate of three points higher than the loan interest would apply, i.e. 5.5%.
This interest would be applied to the instalment you missed (let's say 800 euros) and proportional to the delay. Remember that this 5.5% is for a whole year and that you were only 30 days late, so no, you will not pay 5.5% on the instalment, only the proportional part, which is equivalent to 0.45%. With the example above, the late payment interest would amount to 3.6 euros.