If the bank fails, the mortgage is extinguished? This is one of the most widespread doubts among those who have obtained financing for the purchase of a property, a question also fueled by insistent shares appearing on social networks. But does it really work like this, if the bank closes the contracted debt is it automatically repaid?
As you can easily imagine, reality is very different from common beliefs. In fact, in the event of bankruptcy of a credit institution, the mortgage contract simply comes to an end absorbed by the bank that acquires the assets of the failed institution. In other words, a new bank will take over from the previous one and the payment of the loan installments will proceed as usual for the customer. In any case, before taking out a loan, it is useful to check the solidity of the chosen credit institution and make use of tools to find the best mortgage for your needs.
What happens to the mortgage if the bank fails
Although this is a rare event, even a bank can fail. Generally speaking, a bank fails when it is insolvent, i.e. when the credit institution is no longer able to cover customer deposits and repay creditors, due to the lack of available funds.
But what happens to mortgages when the credit institution goes bankrupt, what obligations do customers have towards the debt contracted for the purchase of a property? As a rule, when the bank fails, two specific mechanisms are triggered:
- L’absorption of the bank by other institutionsas required by the Bank Rescue Decree;
- there account protection with the Interbank Deposit Protection Fund (FITD).
Consequently, to the detriment of common beliefs, when the bank fails the mortgage is not repaid: it will be taken over by a new credit institution and the debtor will have to continue to fulfill its obligations.
What happens to the mortgage with the Bank Rescue Decree
With the entry into force in 2016 of Bank Rescue Decree, also known as Legislative Decree 237/2016, it was established that, in the event of bankruptcy, the credit institution in crisis must be acquired by other banks. The measure was designed not only to avoid serious economic problems resulting from the insolvent bank, but also to guarantee customers the continuity of services.
As a result of this decree, the holders of a mortgage with a bankrupt bank do not suffer any particular consequences: simply, the signed loan will be transferred to the incoming bank. In the event that this happens, it is necessary to remember that the customer must be guaranteed:
- the same amount and the same duration of the mortgage;
- the same interest rateupdated to the rates signed with the previous bank;
- L’absence of new costs of expertise, the presentation of new guarantees or the subscription of additional policies.
In other words, the holder of the loan will be able to continue to take advantage of the same conditions signed with the original bank, without any modification by the incoming credit institution.
What happens to the current account with the Interbank Deposit Protection Fund
Often those who take out a mortgage open a Bank account, or a deposit account, with the same bank that granted the loan. Most of the time for reasons of convenience in paying the mortgage itself, others for the possibility of obtaining more advantageous conditions or additional services.
Consequently, in the event of a bank failure, you should also pay attention to what might happen to your accounts. Thanks to Interbank Deposit Protection Fund (FITD)established in 1987 and became a mandatory consortium recognized by the Bank of Italy in 2011, when the bank went bankrupt:
- the FITD guarantee covers i deposits up to 100,000 euros;
- for joint accounts, the principle of proportionality always applies up to 100,000 euros.
This means that, in the event of bankruptcy, the customer will be able to recover up to 100,000 euros on their deposits. It is precisely for this reason that those with higher liquidity tend to open more accounts with different banks, so as not to lose the portion in excess of this threshold.
Can the mortgage be modified when the bank goes bankrupt?
As already explained, if a banking crisis occurs at the credit institution with which the mortgage was signed, the loan will be taken over by the bank which will acquire the assets. The amount, duration, interest rate and distribution of installments over the year will remain unchanged.
Precisely because a mortgage transfer from one credit institution to another, it is possible to request the change of conditions? For example, the incoming bank could offer its customers more advantageous mortgages than those of the original one.
Faced with the need to change the conditions of the mortgage, the customer can follow two different paths:
- there mortgage renegotiation with the incoming bank;
- there mortgage replacement with the same bank, closing the previous active loan and opening a new one, for example to obtain more liquidity;
- there subrogation of the mortgage at a different bank.
It is useful to remember that it is possible to take advantage of the subrogation of the mortgage – also called loan portability, as provided for by the Bersani Law since 2007 – only between different banks. Furthermore, the subrogation does not allow you to change the amount of the loan. At the same time, however, portability is free while other solutions, such as replacing the mortgage, could involve additional costs, such as a new appraisal and mandatory insurance, being in fact a new loan.
