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Can banks establish a 0% limit on mortgages?


Following the drop of the Euribor, the banking sector reinforces its mortgages linked to this rate, with clauses limiting the minimum interest pay-out to 0%. But after the fall of the “floor clauses”, are they facing another legal battle?

25 february 2016

7 years ago, specifically October2 2008, the 12-month Euribor reached its highest level in 14 years: up to 5,526%. That the interest rate for interbank lending reached such astronomical numbers had severe consequences on mortgages that used it as a reference – that is, most Spanish mortgages. For instance, for a 300,000€ flat with a 30-year mortgage, that could mean an increase of the monthly fee of 400€, 4.800€ more per year.

Then, in a context of recession and an increasing unemployment rate, such a high Euribor meant a headache for clients, but also for banks due to a huge increase in defaulters. Now, with the Euribor below zero and still plummeting, banks have a completely different problem: mortgages do not have a profit margin. New loans are emitted with differentials over +2%, and there is also a rise of the mortgage offer with fixed rates, but those loans signed few years ago with low differentials (even under +0.3%) are approaching a dangerous ground for financial institutions: a negative rate.

Should Spanish banks pay clients for their mortgages? The answer of the banking sector is negative, and for this reason, many of them are planning to apply a “0% clause” on their new contracts. This constitutes a new ground clause, already made illegal during the last year. Would a minimum 0% interest also be irregular?

Speaking for La Vanguardia, the President of the Spanish Mortgage Association, a lobby composed of several financial entities on national soil, said that “it would not be logic nor legal” that banks payed their clients, and that they will go to court to defend their position. However, there are precedents in other countries and with multicurrency mortgages (in this case the banking sector simply reduces the total to be paid back).

The quoted “ground clause” was declared illegal, actually, due to the lack of transparency in the signed contracts. Introducing a minimum rate payment is correct if the client signs the contract in full knowledge of its existence; thus, new contracts should not be affected (theoretically).

But the legal situation is not clear for active mortgages, whose owners have already won in extremis the legal battle on floor clauses. In extremis, because the debate about the retroactive nature of this sentence is yet to be resolved, and with this the refund of all surplus interests payed out. Even if the “zero clause” should be declared illegal, if the cancellation of the retroactivity of the floor clauses was confirmed, there would possibly exist a precedent for the affected entities to extend the final sentence enough years until the Euribor was back to positive numbers (and, thus, giving back naught).

In any case, if the ECB’s Quantitative Easing policy keeps dragging the Euribor to new minimums, the courts will soon have another legal palaver to resolve during the next five years.