The European Court of Justice ruled on 21st December 2016 that Spanish mortgage lenders must reimburse clients with a mortgage containing a floor clause.
The ruling exposes banks to potentially several billion Euros worth of claims from thousands of clients.
What is a floor clause?
The majority of mortgages provided by Spanish banks are linked to a reference rate, typically Euribor.
Variable rate mortgages command a certain spread above the Euribor, for instance + 1.5%. This means that the interest charged on the loan is Euribor + 1.5%.
The Euribor rate has steadily declined over the past few years and is now under half a percent.
Consequently the monthly repayments should have decreased in line with the reduction in the Euribor.
However, many mortgages were granted with a minimum rate of interest. This is know as a floor clause.
This means that although the Euribor has decreased, the repayments may not have changed.
What does this ruling mean?
The Spanish court ruled that floor clauses were illegal in 2013. However, it was stipulated that the banks would not have to pay back overpayments dating back prior to the court ruling.
The judgement by the European Court of Justice removes this threshold.
The ruling has had an immediate impact on the share prices of some of the major Spanish banks, with both Banco Sabadell and Caixabank losing 3% on Wednesday 21st December.
Analysts predict that the repayment of floor clause overpayments could cost the Spanish banking industry in excess of €4bn.
The court statement read:
“The situation of unfairness must have the effect of restoring the consumer to the situation that consumer would have been in if that terms had not existed. Consequently, the finding that “floor clauses” are unfair must allow the restitution of advantages wrongly obtained by the seller or supplier to the consumer´s detriment.”
I have a mortgage in Spain with a floor clause. Will the bank pay me back the amount that I have overpaid?
At this stage it is unlikely that the banks will pay back the money overpaid straight away. Since the Spanish court ruled on floor clauses there have been many court cases in Spain against the banks. It has not been common that a mortgage lender has voluntarily repaid the amounts.
Most cases need to be taken to court. It remains to be seen how the banks handle this new ruling against them.
If you have a floor clause in your mortgage, please feel free to contact us to discuss your circumstances.