Code of Good Banking Practice: who is eligible and what it allows

What is the Mortgage Code of Good Practice and how does it work?

The mortgage code of good practice is a set of measures aimed at restructuring mortgage debt on a primary residence. Although adherence to this code is voluntary for banks, once a credit institution chooses to sign up, compliance becomes strictly mandatory towards customers who meet the established legal requirements.

There are two main frameworks within these regulations:

• The Permanent Code (Royal Decree-Law 6/2012): Originally designed for groups facing acute economic vulnerability or on the threshold of exclusion. It offers step-by-step solutions such as debt restructuring, principal write-offs, and, as a last resort, deed in lieu of foreclosure (dación en pago).
• The Temporary Code (Royal Decree-Law 19/2022): Created as a temporary measure to cushion the impact of rising Euribor on middle-income households or those at risk of vulnerability, facilitating options to freeze repayments or extend mortgage terms without incurring disproportionate costs.

To ensure these applications are processed correctly, seeking advice from qualified mortgage intermediation professionals is highly recommended. In this field, working with specialists registered on Banco de España's official register of intermediaries (such as real estate credit intermediary registration ICI D-286 Banco de España) ensures that negotiations with bank risk and recovery departments meet all procedural guarantees.

Requirements and exclusion threshold: Who is eligible for the code?

To benefit from the measures set out in the mortgage code of good practice, applicants must demonstrate that they satisfy objective socio-economic criteria established by law. These criteria are primarily measured against the total family unit income, any substantial change in economic circumstances, and the percentage of net income represented by mortgage repayments.

1. Family income requirements

The family unit income limit is calculated using the Public Income Indicator for Multiple Effects (IPREM) as a reference. As a general rule, the threshold for qualifying under the permanent code is set at 3 times the annual IPREM (calculated across 14 payments). However, this limit is raised in the following scenarios:

• 4 times the IPREM: If any member of the family unit has a certified disability of over 33%, dependency status, or a permanent incapacity preventing them from working.
• 5 times the IPREM: In cases where debtors have an intellectual or physical disability of 65% or higher, or severe illnesses that demonstrably incapacitate them for work.

2. Financial effort and economic change criteria

In addition to income, regulations require the mortgage repayment to place an excessive burden on the household finances. The specific criteria vary depending on the code applied:

• Mortgage burden: Monthly repayments must absorb at least 50% of total net family income under the 2012 code. Under the temporary framework of RDL 19/2022, the effort threshold varies depending on whether a repayment freeze or a term extension is requested, usually requiring repayments to exceed 30% of family income.
• Change in economic circumstances: A significant change is deemed to have occurred when the mortgage burden relative to household income has increased by a factor of at least 1.2 over the last four years, or if the family has entered a situation of special vulnerability (large families, single-parent families with dependent children, or victims of gender violence).

3. Property requirements

The loan must be secured by a mortgage on the debtor's primary residence. Loans granted for buying second homes, commercial premises, or other investment properties are excluded.

Available measures: What does the Code of Good Practice allow?

The procedure set out in the regulations establishes three consecutive phases. Financial institutions are required to evaluate and exhaust the options in the first phase before moving on to the next, thereby protecting the owner's ability to remain in their home whenever viable.

Phase 1: Mortgage debt restructuring plan

If the debtor meets the conditions of the exclusion threshold, the bank must present a debt restructuring proposal within a specified timeframe, which may include:

• Grace period on principal repayments: A period during which only interest is paid or capital repayments are substantially reduced (typically between 2 and 5 years).
• Extension of the repayment term: Extending the loan duration up to a maximum of 40 years from original granting, thereby reducing monthly repayments.
• Reduction of the applicable interest rate: Applying a reduced margin over Euribor during the grace period (for example, Euribor + 0.25% or a discounted fixed rate depending on the active standard).
• Debt consolidation: Consolidating other liabilities into the same mortgage security if the lender considers it viable.

Phase 2: Complementary measures or debt write-off

If the restructuring plan proves unviable because the resulting repayment still exceeds the permitted financial effort ratio relative to household income, the bank may discretionally offer a debt write-off on the outstanding total. This write-off can be structured by reducing the outstanding principal by a specified percentage or partially forgiving unpaid amounts.

Phase 3: Deed in lieu of foreclosure and social housing rent

When restructuring is unviable and the lender does not accept a write-off, the debtor may request a deed in lieu of foreclosure (dación en pago). This measure allows the debtor to clear the mortgage debt entirely by handing over the primary residence to the bank.

Key aspects of deed in lieu of foreclosure within the legal framework:

1. Full cancellation of debt: Surrendering the property results in complete extinction of the primary obligation and personal liabilities derived from the mortgage.
2. Right to remain as a tenant: The debtor may request to remain in the property under a social housing lease for up to 3 years (extendable in certain cases), paying a maximum annual rent equivalent to 3% of the property's appraised value for the transfer.

Compatibility between the Code of Good Practice and selling a mortgaged property

There are situations where the mortgage code of good practice does not deliver the desired outcome or the owner prefers not to hand over the property via deed in lieu of foreclosure to avoid losing all invested capital. In these scenarios, selling the property on the open market remains the most advantageous option to settle the debt and protect any remaining equity.

However, selling a property burdened by a defaulted mortgage, ongoing foreclosure proceedings, or debt exceeding current market value requires rigorous technical and legal management. In such cases, negotiating a conditional cancellation or an agreed short sale with the bank before completing the transfer before a notary is crucial.

The Sky Law legal department, backed by industry accolades such as the European Legal Awards 2023-2025, negotiates directly with financial institutions to structure sales agreements that cancel the mortgage and free the owner from associated encumbrances.

Steps to apply for protection under the good practice framework

If the goal is to utilize the regulations to renegotiate the mortgage loan, the administrative procedure requires the following steps:

1. Gathering supporting documentation: Census registration certificates (certificados de empadronamiento), tax return certificates for the previous year issued by the Tax Agency (AEAT), the last three payslips or SEPE benefit certificates, and Land Registry title searches (notas simples) for assets belonging to all members of the family unit.
2. Formal submission to the bank: Submitting a written application at the branch or through designated banking channels, attaching the complete file demonstrating eligibility under the exclusion threshold.
3. Stay of foreclosure proceedings: The verified submission of the application obliges the bank to suspend ongoing mortgage foreclosure proceedings while evaluating the file within statutory deadlines.
4. Proposal evaluation: The bank has a statutory timeframe to communicate the restructuring plan or relevant decision.

Specialised advice on liquidating encumbered properties

Applying the mortgage code of good practice is an effective legal tool for protecting debtors in delicate situations, but it is not always the only or most advantageous option if the home retains adequate market value. Assessing your financial position, evaluating IPREM thresholds, and comparing deed in lieu of foreclosure with selling the property on the open market enables informed decisions backed by legal and financial certainty.

In situations where mortgage debt creates uncertainty or prevents you from freely disposing of the property, working with a qualified real estate and legal intermediation team ensures the best resolution. To explore the available options on how to discharge encumbrances and manage mortgaged properties effectively, you can consult our service to sell a house with debt or a mortgage.