Fuzzy Mortgage Clause Triggers £3.5 Billion Cash Bonanza

Lisa Smith, BA (Hons), CeFA

Expats and second home owners in Spain can look forward to a massive cash bonanza from the banks.

A court has ruled that the banks must pay compensation for failing to reduce their mortgage payments in line with interest rates.

Until May 2013, the banks included a clause in mortgage contracts that did not allow loan interest to fall below a certain level – even if the official bank rate was lower.

This clause effectively capped mortgage rate losses for the banks and stopped customers from benefitting from lower interest rates.

The country’s Supreme Court banned the clause in 2013, but disgruntled borrowers took the fight to the European Court of Justice, where they won their claim for compensation.

No appeal

In Spain, the ruling triggered fears over bank stability as the cash won by the campaigning borrowers is expected to cost the banks around £3.5 billion.

The European Court has warned the banks to pay up with delay.

“The judgment is final and there is no appeal,” said a spokesman. “This is the end of the road for legal action in this case.

Around 2 million borrowers are thought to have had the ‘floor clause’ in their mortgage contracts.

“It follows that national case law, such as that following from the judgment of May 2013ensures only limited protection for consumers,” the court said in its written ruling. “Such protection is therefore incomplete and insufficient.”

The court agreed that if the clause was clearly explained to customers, the contract would stand, but if not, borrowers should expect compensation.

Bank shares slump

Trade body the Spanish Banking Association did not expect to lose the case and is prevaricating about making the payments.

“Banks are open to renegotiating with clients but want more details to know how to apply the decision under Spanish law,” said a spokesman.

Shares in many banks slumped on the stock market after the ruling as profit warnings were issued.

The central bank denied the result would lead to a financial collapse and pointed out that recent stress tests showed Spain’s banks could handle the compensation payments.

Spain is a popular destination for expats from Britain, the Netherlands, Germany and Scandinavia, who own homes in the country.

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