EU court OKs mortgage set-off but draws line on bank pressure

(CN) — After Polish homeowners challenged a mortgage they said was unfair, EU judges stepped in Thursday to clarify how much leverage banks can still exert after a loan collapses — and where legal tactics cross the line into discouraging consumers’ rights.

In its ruling, the Court of Justice of the European Union said EU consumer law does not stop banks from offsetting what they are owed against what borrowers reclaim after an unfair mortgage is struck down.

But the judges also set firm boundaries. Any set-off, the court made clear, must come only after the invalidity of a mortgage is established, must not saddle consumers with extra costs, and must not be designed in ways that make taking a case to court feel like too big a risk.

That legal fight grew out of a familiar chapter in Europe’s post-crisis housing boom, when banks across Central and Eastern Europe pushed mortgages linked to foreign currencies like the Swiss franc.

In the years before the global financial crisis, Swiss-franc-denominated loans were marketed as a cheaper alternative to local-currency mortgages. Interest rates in Switzerland were lower, and borrowers were promised smaller monthly payments.

The catch was currency risk. When the franc strengthened sharply after 2008, loan balances and repayments rose overnight, leaving many households owing far more than they had expected and, in some cases, more than their homes were worth.

RM and EM were among those borrowers. The Polish couple took out a 30-year mortgage in 2008 that was pegged to the Swiss franc, a structure that tied their repayments to movements in a foreign currency. The loan was worth about 84,600 euros (roughly $99,400) then.

Over time, disputes across Poland exposed how such currency-linked clauses could shift risk onto borrowers and reshape the economics of a loan. By 2022, RM and EM had paid back about 77,000 euros (around $90,500) under their mortgage. At that point, they began to question whether the foreign-currency terms built into their contract were lawful at all.

That question proved decisive. In 2022, the couple sued in Warsaw, asking a regional court to declare the mortgage void and order Santander Bank Polska to give back the money they had already paid.

Santander insisted the contract was lawful. Then, while the case was still pending, the bank raised the stakes. In July 2024, it demanded repayment of the full loan principal within about two weeks and said it would set that amount off against the borrowers’ claim.

In December 2024, the Warsaw court declared the mortgage void, finding the contract could not stand. What followed was far less clear. Under Polish case law, an invalid contract can leave both sides with separate repayment claims, one owed by the bank and one by the borrower.

That put the judges in a bind. Could a bank offset its own claim while still insisting the contract was valid? Could it impose such a short repayment deadline? And if set-off reduced the borrowers’ recovery, might consumers end up paying part of the legal costs despite winning on the substance?

Those doubts sent the case to Luxembourg.

The EU judges began by reaffirming a core principle of consumer law. When a contract contains unfair terms, courts must strike them out and make sure money is put back where it belongs. If that does not happen, the ban on unfair terms is little more than words on paper. At the same time, EU law does not micromanage what follows once a contract is void, leaving national courts room to apply their own procedures so long as consumers are not put at a disadvantage.

That tension shaped the court’s answer. The judges said a set-off mechanism can fit within EU law because it keeps disputes simpler and avoids the pointless back-and-forth of money or parallel lawsuits that only drive up costs. Used properly, the court made clear, set-off does not weaken consumer protection but can actually make enforcing rights more practical.

Crucially, however, they rejected any idea that banks can leverage timing or pressure to gain the upper hand. The court stressed that, “as long as the seller or supplier claims that the agreement concluded with the consumer is valid, any formal notice served on the consumer with a view to repayment of the loan capital cannot have any effect.” And even where national law allows a short deadline, judges must ensure it does not discourage consumers from invoking EU protections.

On costs, the court stressed that while EU law does not give consumers a free pass on expenses, “the rules on allocating the costs for such proceedings must not deter a consumer from exercising that right.”

Padraic Kenna, a law professor at the University of Galway, said the ruling sends a clear signal about what comes after unfair terms are struck out of a mortgage.

Even then, he said, national rules on repayment, set-off or court costs do not operate in a vacuum. The court made clear those tools must serve the broader goal of protecting consumers from unfair mortgage terms, and cannot be used to deter borrowers from going to court or erode their basic procedural and housing protections under EU law.

That formal safeguard, however, may not be the whole story in practice.

Jorge Morais Carvalho, an associate professor of consumer law at NOVA School of Law, said the ruling follows a familiar EU path but stops short of grappling with a harder reality beneath the legal theory.

Courts may emphasize that borrowers should be clearly informed about what happens when a contract is void, he said, but that guidance means little if consumers are then expected to repay large chunks of loan principal on impossibly short notice. Faced with deadlines that can be “economically impossible,” borrowers are left with what amounts to a choice in name only.

By glossing over that economic pressure, Carvalho added, the court risks entrenching a restitution system that works neatly on paper but in practice hinges on how much money a consumer has and how much leeway a national judge is willing to give, leaving unanswered whether immediate repayment rules genuinely allow people to exercise the rights EU law promises them.

Others see the ruling as offering more concrete protection if national courts apply it carefully.

Joasia Luzak, a law professor at the University of Exeter, highlighted one of the ruling’s clearest lines in the sand: Banks can recover only the loan capital, and nothing extra for a borrower’s past use of the money.

She also added that when set-off is handled within the same case and both sides’ claims are weighed together, it can actually protect consumers instead of cornering them.

Done that way, Luzak explained, set-off stops banks from jumping the line with separate repayment suits while a borrower’s own case is still pending. It cuts down on unnecessary back-and-forth, speeds up disputes and helps ensure consumers are not left worse off simply for standing up for their rights.

Lawyers for the borrowers, the bank and Poland’s justice ministry did not immediately respond to requests for comment.

The EU court did not settle the Polish dispute itself. Instead, it sent the case back to Warsaw, telling national judges to apply its guidance and make sure repayment deadlines or cost rules are not used in ways that frighten borrowers out of enforcing their rights.

For now, the judgment sketches a careful line. Banks are not shut out from defending themselves after an unfair mortgage collapses, but EU law will step in if the balance tips toward pressure tactics that make consumer rights illusory.

Courthouse News reporter Eunseo Hong is based in the Netherlands.