Claim for Repayment against Banks for LIBOR Mortgages

LIBOR mortgages are mortgages with a term of three to six months and simple termination conditions. The mortgage interest rate in said periods is based on the current market conditions. 

The Zurich High Court recently published a court decision on LIBOR mortgages. It concerns a client of a bank who claims to have paid too much interest. The bank violated its duty of disclosure by informing the client that he had been paying too much interest for years. The client is now claiming back the overpaid interest from the financial institution. 

The question arises: How can it happen that banks have to pay interest to their customers for mortgages that the customers have taken out? It sounds strange, but there is a plausible reason: since August 2011, there have been negative interest rates in Switzerland for the first time in a long time. However, the banks had not expected the LIBOR interest rate to become negative. Therefore, the case of a negative interest rate was not explicitly mentioned in the clauses of the mortgage contracts. 

The interest rate of a LIBOR mortgage is based on the LIBOR (London Interbank Offered Rate). The amount of interest to be paid on such a mortgage can be calculated adding the bank’s margin to the LIBOR rate. However, according to the 2012 framework contract for mortgage loans, the bank assumed a base value of 0% for a negative LIBOR rate and added its margin to calculate the mortgage interest rate. In the court case, it was therefore disputed whether the zero interest floor was agreed upon in the framework contract. The Supreme Court at least acknowledged that the bank’s confirmation letters did not constitute separate agreements. Rather, they are an indication of the content of possible oral agreements. However, the bank client is free to produce evidence to counter the underlying assumption, whereby it is sufficient for rebuttal that justified doubts arise as to the accuracy of the confirmation letters.

Overcharged interest could be reclaimed in the future. To have a legitimate claim, the following conditions must be met: 

• Neither in the contract nor in any (oral) side agreements may a base rate of at least zero be agreed upon;
• The claim starts from the first interest payment after the introduction of negative interest rates; the claim ends if a new contract or a separate agreement with a lower limit for the base rate is accepted;
• The limitation period for claiming repayment is five years; in some cases, ten years from the end of the claim.

The case is sent back to the district court for evidentiary proceedings. The plaintiff must then be able to prove that there was never any mention of a zero interest floor during the contract negotiations. The present case is therefore not yet decided. However, the deprivation of the contractual character of confirmation letters could already lead to a tidal wave of requests for recovery.