By Jesús Aguado

MADRID (Reuters) – Spain’s cabinet on Tuesday gave its approval to mortgage relief support for more than one million vulnerable households and help for middle-class families a day after the government and banks reached an agreement in principle.

The measures are subject to final negotiations with banking associations, Economy Minister Nadia Calvino said, adding that banks had a month to sign up ahead of their planned implementation next year.

Santander, Spain’s biggest lender, warned the measures could lead to higher bank provisions and more barriers to credit for customers, while other major banks said they were still studying the fine print.

The ministry did not provide details on the potential cost to lenders and the extent of extra provisions which banks may need to set aside remains unclear.

Santander CEO Jose Antonio Alvarez told journalists on Tuesday that loan extensions could also lead to higher capital consumption while also making access to credit harder for some clients.

Alejandra Kindelan, head of Spain’s AEB banking association said her organisation was still evaluating the measures, as did Caixabank CEO Gonzalo Gortazar.

Non-performing loans at Spanish lenders as of August stood at nearly record lows of 3.9%, far below the all time-high of 13.6% in December 2013.

In Spain, around three-quarters of the population are homeowners, with most opting for floating-rate mortgages which are exposed to interest rate rises.

The planned measures are part of a wider package of support to help ease cost of living pressures which includes a rebate on fuel costs and windfall tax proposals. Other countries, such as Hungary, Portugal, Poland and Greece, have approved different forms of mortgage support.

Spain’s banks will provide mortgage support for vulnerable families earning less than 25,200 euros ($25,815) per year through an amended industry-wide code of good practice.

They will be able to restructure mortgages at a lower interest rate during a five-year grace period.

That will allow borrowers to delay payments on the principal of the loan without being charged late fees and to avoid defaults or loan cancellations.

The period for cancelling debt has been extended by two years and provides for a second restructuring if necessary, the ministry said.

Vulnerable families that spend more than 50% of their monthly income repaying their mortgage but do not meet the condition set out in the previous code of a 50% rise in their mortgage payments can take advantage of a two-year grace period.

Middle-class families with an income of less than 29,400 euros who risk defaulting will also receive additional protection.

In those cases, lenders must offer 12-month freezes on repayments, a lower interest rate on the deferred principal and loan extensions if a mortgage burden represents more than 30% of household income and the cost has risen by at least 20%.

Measures will also make it cheaper for families to switch from variable to fixed rate mortgage contracts.

($1 = 0.9762 euros)

(Reporting by Jesús Aguado; additional reporting by Belen Carreno, Emma Pinedo, Inti Landauro and David Latona; editing by Emelia Sithole-Matarise and Jason Neely)

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