We invite you to read the column written by our Tax Group Director, Andrea Bobadilla, where she referred to the complications that the elimination of the Unidad de Fomento (UF) could have for mortgage loans.
In recent weeks, a topic that resurfaces from time to time has reappeared in public discourse: the possible elimination of the Unidad de Fomento (UF). This parliamentary motion, presented in 2023 and now advancing in the Chamber of Deputies’ Economy Committee, seeks to eliminate its use, affecting mortgage loans in particular.
This is not a minor debate. Almost all families who buy a home in Chile do so with mortgage loans denominated in this unit. Currently, obtaining a mortgage loan has become much more difficult. House prices have risen, salaries have not grown at the same rate, and banks require more paperwork for approval. In this context, it is logical that many people are annoyed to see their UF dividends continue to rise.
But here the fundamental question arises: does eliminating the UF solve anything, or could it end up creating a bigger problem?
While it is understandable that many people are upset about the sustained increase in values expressed in UF, given persistent inflation and greater restrictions on access to mortgage financing, in my opinion, it is essential to address this issue seriously, from a technical and legal perspective, as prestigious institutions in our country, such as the Central Bank of Chile and the Financial Market Commission, warn that eliminating the UF could have structural effects, with negative consequences for the economy, contractual security, and access to housing.
To understand the debate, we must go back to its origins: the UF was created more than half a century ago by the Central Bank of Chile with the specific aim of providing a financial stabilization mechanism designed to mitigate the effects of inflation on long-term contracts. The logic behind its design is as simple as it is powerful. In simple terms, it was created to protect values by adjusting them over time in line with changes in the Consumer Price Index (CPI), so that long-term financial commitments maintain their real value over time.
Thanks to this, it has been possible to offer long terms and lower rates, as is the case with 20-, 25-, or 30-year mortgage loans. In short, the UF provides certainty for both the debtor and the creditor.
Eliminating UF does not make inflation disappear. What changes is who assumes the risk. In the mortgage market, this risk would fall directly on banks or lenders, who would reasonably pass it on to customers, raising interest rates, demanding more guarantees, and imposing more restrictive conditions for obtaining a loan. In other words, instead of facilitating access to housing and solving the problem, this measure would make it more expensive and limited.
From a legal standpoint, the problem is no less complex. There are currently millions of contracts in force structured in UF, including mortgages, leases, insurance, debt instruments, among others. Forcing their conversion to pesos would imply modifying them, affecting the principle of contractual freedom enshrined in Article 1545 of the Civil Code. This would undoubtedly create an environment of legal uncertainty and open the door to massive renegotiations and, why not say it, highly litigious consequences, due to potential breaches and imbalances that this would generate.
In the long term, the effects would not be merely temporary. Changing this adjustment mechanism could even slow down investment in a real estate sector that has already been in crisis in recent years. Ultimately, those who would feel the impact most would be the very families who are currently hoping to finance their homes.
The UF is simply the thermometer that measures this inflationary fever. The problem is persistent inflation that erodes purchasing power.
Breaking the thermometer (the UF) does not cure the fever; it only leaves us without a tool that has provided stability to long-term contracts for decades. In my opinion, changing it involves legal and financial risks that must be seriously assessed before eliminating it.
Column written by:
Andrea Bobadilla | Director Tax Group | abobadilla@az.cl
