On 10 November 2016, the Seimas adopted the Law on Credit Relating to Immovable Property of the Republic of Lithuania (hereinafter referred to as the “Law”) which addresses the procedure for granting and disbursement to natural persons of mortgage loans and other credits relating to immovable property. Until now some matters were either regulated inconsistently under several legal acts or not at all.
Consumers have more time for reflection and the chance to change their minds
The Law stipulates that the creditor must grant to the borrower a reflection period of at least 30 days for deciding on the conclusion of a credit agreement. The borrower may choose to conclude a credit agreement before the deadline set by the creditor. It is important that the creditor’s binding offer to grant a credit during the reflection period becomes binding on the creditor: if the borrower decides to conclude the agreement, the creditor must conclude it under the terms and conditions set forth in the offer.
Thus, the borrower can take time to reflect on the proposed terms and conditions and compare them with the offers provided by other banks or other financial institutions without taking the risk that the offer may be changed or cancelled in case the agreement is not concluded immediately after the submission of the offer.
With a view to ensure that it is easier for borrowers to compare the terms and conditions applied by different creditors, the Law obliges creditors to provide standard information about the credit in the standard form established by the supervisory institution.
If the borrower hurries or hastily decides to conclude a credit agreement, the Law provides for the so-called “cooling-off period”. The borrower has the right to withdraw from the credit agreement within 14 days following conclusion of the agreement.
Creditors will not be able to request that a consumer taking a mortgage credit would simultaneously undertake to use other services provided by the creditor as well, except for the insurance of pledged assets and the requirement to have a restricted-use payment account intended for accumulating repaid credit funds and/or managing the credit. However, the borrower will have the right to conclude an insurance contract with another insurance undertaking than that proposed by the creditor provided the insurance coverage granted under the insurance contract is equivalent to the coverage that would be available under the insurance contract concluded with the insurance undertaking proposed by the creditor.
Upon the entry into force of the Law, the fixed interest rate can be only the rate that remains unchanged during the entire validity period of the credit agreement. Thus, even if the interest rate is changed every 5 or 10 years in case of a longer validity period of the credit agreement, such interest rate will be considered to be variable.
More favourable credit repayment procedure
The Law provides for the borrower’s right to repay the credit or any portion thereof before the expiration of the validity period of the agreement. In such case the creditor will be entitled to compensation but it may not exceed 3 % of the credit amount or any portion thereof being repaid. Compensation will have to be calculated under the procedure laid down by the supervisory institution.
Just like under the current practice, the credit or any portion thereof may be repaid without any charge on the date when the variable interest rate is changed.
Furthermore, the Law entrenches the possibility of a “payment holiday”, i. e. the postponement of the payment of instalments, except for interest, for a period not exceeding 3 months. However, the creditor can grant a payment holiday only in exceptional cases where the borrower does not meet the established requirements for creditworthiness assessment and responsible lending relating to the debt-to-income ratio of the borrower’s financial obligations under credit and other agreements, and if there is at least one of the following circumstances: 1) the dissolution of the borrower’s marriage; 2) the death of the borrower’s spouse; 3) job loss by the borrower or his/her spouse; 4) recognition of the borrower’s total or partial loss of the capacity to work under the procedure laid down in the Law on the Social Integration of the Disabled of the Republic of Lithuania. As a matter of fact, the payment holidays may be longer by mutual agreement of the parties.
In case of late payments, the default interest applicable to the borrower may not exceed 0.05 % of the delayed amount for each day of delay. Any other default interest and payments for the default on the obligations under the credit agreement may not be applied to the borrower.
New Law will apply to concluded agreements as well
The new Law will undoubtedly affect persons signing new credit agreements; however, it is also foreseen that some provisions, mainly relating to debtors’ rights, will be applicable to the agreements concluded before the entry into force of the Law. For example, the provisions regarding the cap (0.05 %) on default interest charged for the failure to fulfil the obligations under the credit agreement, payment holidays, early repayment with compensation up to 3 %, etc. are applicable to the concluded agreements as well.
In case that the material terms and conditions of the credit agreement concluded before the entry into force of the Law are amended, the new Law will apply to the amended credit agreement.
After the Law has been signed by the President, it will enter into force on 1 July 2017.
Jolanta Liukaitytė-Stonienė, Senior Associate, law firm GLIMSTEDT
Teisininkai: Jolanta Liukaitytė-Stonienė