Unfair terms in mortgage contracts are clauses imposed by banks that unfairly or disproportionately affect consumers’ rights.
These clauses usually impose unfavourable conditions on the customer and create a significant imbalance in the relationship between the lender (the bank) and the borrower (the customer).
In many cases, these clauses have been the subject of legal disputes, with judgments declaring them null and void on the grounds that they are contrary to consumers’ rights.
I.- DEFINITION OF UNFAIR TERMS
According to European and Spanish legislation, an unfair term is a term which has not been individually negotiated and which causes a significant imbalance between the rights and obligations of the parties, to the detriment of the consumer.
These clauses are usually found in adhesion contracts, in which one of the parties (the consumer) adheres to the conditions imposed by the other (the bank) without any real possibility of negotiation.
The legal framework governing unfair terms in Spain includes the General Law for the Defence of Consumers and Users and the European Directive 93/13/EEC on unfair terms in consumer contracts.
II.- TYPES OF UNFAIR TERMS IN MORTGAGE CONTRACTS
There are several types of terms in mortgage contracts that have been found to be unfair by the courts. The most common are:
1. FLOOR CLAUSE
The floor clause sets a minimum limit on the interest the consumer can pay, even if the interest rate falls below that limit.
This affects variable-rate mortgages because it prevents the customer from benefiting from falls in the Euribor or reference rate.
Although the European Court of Justice declared this clause to be abusive in 2016, many mortgages are still affected by it.
On 4 July 2024, the CJEU upheld the merits of collective actions brought by consumer associations, such as the Spanish Association of Bank, Savings Bank and Insurance Users (ADICAE), against several financial institutions for the inclusion of floor clauses in mortgage contracts.
The Court confirmed that the control of the transparency of these clauses can be carried out in the framework of a collective action, even if it is directed against numerous entities, provided that the clauses in question are similar and belong to the same economic sector.
On 8 December 2024, the 11th Court of First Instance of Gijón ruled that waiver clauses agreed between banks and customers, whereby floor clauses are eliminated or reduced in exchange for the customer’s renunciation of legal action, can be considered abusive if the bank does not adequately inform the customer of their implications.
This ruling allows consumers to review agreements signed with banks even years later, underlining the importance of transparency in these agreements.
2. EARLY TERMINATION CLAUSE
This clause allows the bank to cancel the mortgage contract and demand full payment of the debt if the customer fails to pay a single instalment.
This creates an imbalance between the parties, as it is a disproportionate penalty in the event of non-compliance with the contract.
3. LATE PAYMENT INTEREST CLAUSE
Interest on arrears, applied when the customer does not pay on time, has been declared unfair if it exceeds a reasonable limit.
The Supreme Court has ruled that an interest rate that is two points higher than the normal interest rate is abusive.
4. MORTGAGE COSTS CLAUSE
In many mortgages, the costs related to the formalisation of the loan (notary, registry, agency, etc.) have been imposed exclusively on the client.
However, the courts have ruled that these costs must be shared between the two parties and cannot be borne entirely by the consumer.
5. MULTICURRENCY CLAUSE
Multi-currency mortgages are loans where the capital is linked to a foreign currency (such as the Japanese yen or the Swiss franc).
In many cases, consumers have not been properly informed of the risks associated with currency fluctuations, which has led to these clauses being considered unfair by the courts.
6. IRPH (MORTGAGE REFERENCE INDEX)
The abusive IRPH clause refers to the inclusion of the Mortgage Loan Reference Index (IRPH) as an interest rate in a mortgage contract when its use does not comply with the transparency criteria established by law.
The IRPH is an official index used to calculate interest rates on some mortgages in Spain, as an alternative to the more widely used Euribor. However, its legality has been questioned in many cases due to the lack of information provided to consumers on how it works and the financial consequences.
The use of IRPH, combined with the absence of a negative spread (as recommended by the Bank of Spain), could create an imbalance to the detriment of the consumer.
On 12 December 2002, the Court of Justice of the European Union (CJEU) issued an important ruling on the mortgage reference index (IRPH). The CJEU ruled that national judges must assess, on a case-by-case basis, the transparency and legality of clauses incorporating the IRPH in mortgage contracts.
In particular, the Court pointed out that financial institutions are not obliged to provide detailed information on the IRPH if it has already been published in the Official State Gazette and is accessible to an average and reasonably well-informed consumer.
In addition, it stressed the need to verify whether the Bank of Spain’s warnings on the application of a negative differential to the IRPH were included in the contracts, in order to ensure that an imbalance was not created to the detriment of the consumer.
III.- LEGAL CONSEQUENCES OF UNFAIR TERMS
If a clause is declared unfair by the courts, it is considered null and void, which means that it has no legal effect from the moment it is included in the contract. This means that:
- The consumer is entitled to a refund of the sums paid as a result of the unfair clause, as is the case with the refund of interest in the case of floor clauses.
- The mortgage remains in force, but without the application of the unfair term, which means that the customer must continue to fulfil his obligations, but under the conditions corrected by the court.
- The bank cannot impose a similar clause in future operations, as this would be contrary to consumer protection regulations.
IV.-CONSUMER PROTECTION AND COMPLAINTS
Consumers have the right to complain if they consider that their mortgage contains an unfair term.
The steps to take include
- Examination of the contract: it is essential to analyse the mortgage contract with the help of a lawyer in order to identify possible unfair terms.
- Out-of-court claim: Before going to court, it is advisable to file a claim with the bank, asking for the clause to be declared null and void and for the excess sums to be refunded.
- Legal action: If the bank does not respond to the complaint, the next step is to file a lawsuit. Recent judgements have ruled in favour of consumers in many cases of unfair clauses, particularly in relation to the floor clause and mortgage charges.
SUMMARY
Unfair terms in mortgages are a problem that affects thousands of consumers and creates a significant imbalance in contracts between banks and customers.
It is essential that consumers are informed of their rights and that the terms of their mortgage comply with consumer protection legislation.
If an unfair term is discovered, it is important to act through a formal or legal complaint to rectify the situation and recover any amounts unduly paid.
If you are interested in more specific information about a clause, or if you need to initiate a claim to have an abusive clause in your mortgage declared void, please contact us.
