With property prices reputed to have fallen throughout Italy (on average, a price reduction of -18% in Florence and Turin and -16% in Rome, followed by similar reductions throughout Italy) and corresponding reductions in the rental market, the Italian Government has launched a raft of legislation aimed at protecting property owners in Italy from the worst ravages of the credit crunch.

One of the main provisions is effectively a “safety net” which caps to 4% the interest payable on variable rate mortgages used to finance the purchase or restoration of the main, residential home in Italy. Any interest in excess of this rate is effectively paid by the State, with a corresponding tax credit to the Italian banks which are called to implement this new measure.

1) The 4% rate cap on mortgages - who may benefit.

The legislation passed at the end of January 2009 in its final form applies to anyone who has taken a “variable rate mortgage” (Mutui a tasso variabile) to finance the purchase or restoration of the “main residence” (Abitazione principale) in Italy, with limited exceptions for luxury properties, before 31.10.2008. This benefit applies to individuals only and not to companies.

Secondary regulations currently being drafted will provide further guidance on the meaning of “variable rate mortgage”, given the great variety of different types of mortgage, currently available.

2) The 4% rate cap on mortgages - how it will work

It is important to keep in mind that much of the detail of this new legislation is going to be provided by secondary regulations which are still being drafted. An implementing circular is expected from the Italian Finance Ministry, as the benefit will be financed by a tax credit to the implementing banks.

However on a practical level, the benefit will be automatic in the sense that no application will be required by the taxpayers affected. Given that the Italian tax authorities already have full details of all taxpayers who claimed the main residence benefit at the time of acquisition of their property, lists will be sent to all Italian banks, who will select their clients who have taken out the relevant mortgages.

Where the Italian banks will become aware that the benefit applies to any of their clients, the relevant bank will first debit the full amount of the relevant mortgage instalment (when actually due) and then at the same time, will credit back any amount of interest charged on variable rate mortgages, in excess of 4%.

Italian banks will then report the amounts credited back (expected to total approximately Euro 350 million) to the Italian Revenue, thus becoming entitled to a tax credit for the amounts paid back.

Under current legislation this benefit will apply for the whole of 2009 only. Where the benefit is delayed, the taxpayer will be entitled to a full credit, and placed in the same position as if he had received the benefit from the 1st January 2009.

3) Further protection for Italian property owners.

The above provisions are only part of a much wider strategy of support for the Italian economy. Other provisions are also likely to benefit property owners.

- European Central Bank rates - Italian banks are now legally required to offer to borrowers mortgages directly linked to the European Central Bank rate, rather than as it was in the past, linked to Euribor, the interbank rate. The choice of course, is open to the borrower.

This is due to the fact that in the last few months, the Euribor rate, which is the rate applicable to loans between banks has been rather volatile. Mortgages linked to the European Central Bank rate promise to be more stable in the short term, even if they may not always be less expensive. It is to be expected that any rate reduction in the European Central bank rate will be passed to the borrowers far more quickly than was the case with the Euribor mortgages.

The Bank of Italy, the authority which has the supervision of banks operating in Italy has also issued regulations requiring Italian banks to offer full information and choice to potential borrowers, on all the option legally available and open to them.

- Provisions for the transfer of mortgages, from one bank to another - General provisions aimed at making it easier for borrowers to transfer their mortgages from one bank to another (Portabilita` del mutuo) and thus increasing competition between banks operating in Italy were introduced a few years ago.

Rather surprisingly, the new legislation now provides that the transfer of a mortgage from one bank to another, in Italy, is effected free of charge. Italian notaries and Italian banks are required to provide their services related to the transfers of mortgages without charging fees.

These provisions apply where the mortgage in question was used to finance the taxpayer’s main residence or restore it, there are also a number of other restrictions.

- Bank regulation - The same legislation declares illegal and unenforceable some terms usually found in the current account documentation of banks in Italy. These terms must now unilaterally be removed by the banks from the contract with their clients, within 150 days of the new legislation coming into force.

These terms relate to bank charges levied as a percentage of the funds potentially made available to clients, whether these funds / borrowing limits are actually used / borrowed or not (Commissione di massimo scoperto and Provvigione di conto), or where the funds have actually been used for less than 30 days. Where a bank does not comply the client can refer to the Italian banking ombudsman (Ombudsman Bancario) in Rome, or take the matter to Court.

4) The wider picture.

The above provisions are only a small part of a larger piece of legislation in support of the poorer members of society and small / medium enterprises, whose estimated total value is up to Euro 5 billions.

Other provisions relate to a bonus ranging between Euro 200 and Euro 1000 to resident poorer families, the freezing of charges, tariffs and costs normally linked to inflation and support for small / medium companies.

Various other provisions relate to other changes to Italian taxes which will generally support the economy at a critical time. The writer very much hopes that these measures will have the desired effect.