Date: 08-07-2025

Reverse mortgages are aimed exclusively at clients over the age of 65 who need liquidity. The bank provides these individuals with a loan secured against their home, usually paid out in the form of monthly instalments. Upon the client’s death, if the loan hasn’t been repaid, the heirs must settle the debt or the bank takes ownership of the property.

Although this financial product is still not widespread in Spain (only 1,500 reverse mortgages have been granted in the last seven years, according to the General Council of Notaries), the first court rulings are emerging, highlighting a lack of transparency in how these loans are marketed.

In most cases, reverse mortgages structure interest in a particular way. Rather than requiring monthly repayments, they allow interest to accumulate and be added to the debt, which in turn generates additional late payment interest. For example, if a loan carries a fixed interest rate of 5% and the borrower doesn’t make payments, that interest is rolled into the principal—meaning 5% is then charged on a growing amount, increasing the overall cost for the client.

The Provincial Court of Barcelona, in a ruling dated 3 April, stated that while capitalisation of interest is recognised under the Spanish Civil Code, both the case law of the Court of Justice of the European Union and the Spanish Supreme Court require banks to ensure transparency in loan terms. This goes beyond simply using clear wording—it means the consumer must actually understand how the loan works. The court stressed that banks must provide clear, upfront information before the contract is signed.

As a result, the court concluded that even if a customer believed they were signing a loan with a final interest rate of 6.25%, “in reality, they were contracting a loan with much higher interest, since unless the borrower paid the interest monthly out of their own funds, the accrued interest would itself generate further interest, leading to an exponential snowball effect.”

The court added that, given the way the clause was worded and the lack of sufficient information provided to the client, it could not be assumed that they had any real idea of the financial cost of the loan—“which goes against the principles of good faith and represents a serious imbalance to the consumer’s detriment.”

Two earlier rulings from the Provincial Court of the Canary Islands (dated 8 February and 4 September 2023) also declared such interest clauses null and void, stating that the phrase “accrued interest is capitalised” was too vague for consumers to understand that this meant the amounts would themselves generate new interest.

A previous judgement by the Provincial Court of the Basque Country, dated 10 June 2021, had already completely annulled a reverse mortgage because its interest clause failed the transparency test, as it did not allow the consumer to understand the financial burden involved in the agreement.

Source: El Economista

Writter: Eva Díaz