Mortgage Loan Benchmark (IRPH)

The origin of the IRPH, as the official reference type in Spain, dates back to August 3, 1994. On that date, complying with the obligation to supplement the annexes of the Order published on May 11, 1994 on transparency of financial conditions of mortgage loans, the Bank of Spain elevated the IRPH to official.

Thus, in August 1994 the IRPH, officially known as the average rate for mortgage loans over three years, was regulated. With the publication of the official reference rates for the mortgage market, the Spanish Ministry of Economy and Finance aimed to protect clients. To do this, in addition to raising several more indices to the category of officers, it issued several regulations on those loan contracts with mortgage guarantee that were intended to acquire a home. That is, it imposed a way of acting on entities that offered mortgage loans for homes that tried to prevent customers from being misinformed about the mortgage they signed.

Despite this, as we will see later and as indicated by the Court of Justice of the European Union (CJEU), some entities did not comply with the indications of that circular whose ultimate purpose was to protect customers through transparency and information.

How is the IRPH calculated?

Although, in essence, there is only one way to calculate the IRPH, formally there are three types of IRPH. That of banks, that of savings banks and that of all credit institutions. The formulas are described below:

• Average rate of mortgage loans over 3 years from banks

Where:

i _b : Average of the banks’ weighted average interest rates

n _b : Number of banks participating in the calculation

• Average rate of mortgage loans over 3 years from savings banks

Where:

i _ca : Average of weighted average interest rates of savings banks

n _ca : Number of savings banks participating in the calculation

• Average rate of mortgage loans over 3 years of the set of entities

Where:

i _b : Average of the banks’ weighted average interest rates

n _b : Number of banks participating in the calculation

i _ca : Average of weighted average interest rates of savings banks

n _ca : Number of savings banks participating in the calculation

i _sch : Average of the weighted average interest rates of mortgage credit companies

n _sch : Number of mortgage credit companies participating in the calculation

Great, we already know the formulas, but how to apply it? To understand the formula well, it is necessary to know the concept of the interest rate, the weighted average and the summation. What the formula does is calculate the average of the average rates. That is, if the weighted average interest rate of bank X is 10% and the weighted average interest rate of bank Y is 5%, then the average weighted average interest rate will be 10 + 5 divided by 2 (we have 2 banks). This is 7.5%. Now, when calculating the weighted average interest rate of each bank, how do we do it?

Let us imagine that bank X has in its portfolio mortgage loans with a term of more than three years (which are computed for the calculation) for a value (taking into account the principal ones) of 10 million euros. In total, it has 20 loans in its portfolio. Although the sum of the 20 is 10 million euros, not all loans are of the same amount. Specifically, the principal of one of them (outstanding balance) amounts to 5 million euros. Being 50% of the total portfolio that it computes, it will have more weight than the rest of the 19 mortgage loans. Therefore, when it comes to taking the bank’s average, the interest rate at which that loan of 5 million was signed will be more decisive in the calculation.

In summary, the IRPH is calculated according to the following steps:

1. The weighted principal of the loans pending payment with a term of more than three years for a given bank are added.
2. Once we have the main weights, it is divided by the number of loans granted from that bank (that meet the criteria).
3. After 1 and 2, we will have obtained the weighted average interest rate of a given bank. So, we will do 1 and 2, for each bank.
4. Once we have the weighted average interest rates of each bank, we add them and divide them by the number of banks. We will have obtained the IRPH from the banks.
5. It will be necessary to do steps 1 to 4 for savings banks and mortgage companies.
6. Once we have the three IRPHs, we take the average and the result must be identical to the one obtained by carrying out the last formula.

Controversy and criticism

The controversy of the IRPH arises due to the concern (and complaint) of many clients about the difficulty involved in knowing where the IRPH numbers come from. In principle, the Bank of Spain was the entity that officially published this index. However, in 2011 a process began that would culminate in the disappearance of the index as official. Specifically, around 2013, the IRPH banks, IRPH savings banks and the reference asset type of savings banks (CECA) disappeared. The intention was to harmonize the accounts at European and national level, as well as to adjust the costs of the loans to the real cost at which the banks obtained resources.

In other words, the IRPH was too expensive. And, indeed, although the Bank of Spain continues to publish it, it has not been considered official since October 2013. The criticism of the index, in addition to its opacity, was that it does not comply with one of the articles of the order with which it was born.

It should be noted that Order May 5, 1994 insists on the fact of transparency when collecting commissions, on the objective calculation of the indices and on the non-inclusion of factors that depend exclusively on the entity or entity. that may cause it to vary too much. Some entities, by incorporating hidden commissions in the interest rate, were bypassing the regulations. As if that were not enough, they marketed the IRPH as fixed interest, when in reality it is variable. And, to make matters worse, they claimed that it was less volatile historically than the Euribor, which is false.