Interest-Only Loan and Switch-to-Repayment Clause: The Bank Must Inform the Borrower of the Precise Criteria From Subscription (Cass. civ. 1re, 25 March 2026, No. 24-16.108)

French Supreme Court (Cour de cassation), First Civil Chamber, 25 March 2026, appeal No. 24-16.108

What Was the Background to the Case?

On 1 December 2009, a bank granted a borrower a mortgage of €153,741, at a variable interest rate, with a complex structure: it was an interest-only loan that could, in due course, switch to a repayment loan. The offer provided for an anticipation period of 24 months, followed by a repayment deferral period of 240 months (20 years), then a repayment period of 120 months (10 years).

The loan was secured by the pledge of two life insurance policies with an initial value of €10,000 each, and by a contractual mortgage (hypothèque conventionnelle) on the financed property. One of the policies matured in 2018; its funds were then transferred to the second by amendment.

A clause of the loan provided, at the 8th anniversary of the contract, for a check of the surrender value of the pledged life insurance policies. On the basis of that value, the lender “determines” an assessment at the end of the interest-only period. The borrower may keep on an interest-only basis only the portion whose repayment is thus established; the surplus switches automatically to repayment status, over the remaining term of the original interest-only period.

Implementing this clause, the bank informed the borrower, on 16 April 2018, that she had to fund the pledged life insurance policy up to €91,680 in order to keep the benefit of the deferral. Having failed to make this top-up, the loan became repayable on an amortising basis for €134,749, and was maintained on an interest-only basis for only €18,051 (corresponding to the value of the life insurance actually available). The monthly instalments went from €569.48 (repayment deferral) to €1,201.01, more than double.

The borrower brought proceedings against the bank. She relied on the unfair nature of the switch clause and on a breach by the bank of its duty to inform. The Paris Court of Appeal (cour d’appel de Paris) dismissed her claims. The French Supreme Court, in its judgment of 25 March 2026, partially quashes the judgment on both grounds.

How Does a Switch-to-Repayment Clause Work?

This clause, invented by bank marketing in the 2000s and 2010s, presents a theoretical advantage for both parties: the bank secures repayment of the capital by imposing on the borrower a return to a conventional scheme if the value of the underlying asset is not sufficient; the borrower keeps, on paper, the benefit of the advantageous tax treatment of the interest-only loan during the first years.

In practice, the clause can be devastating for the borrower. For two reasons. First, the switch threshold is almost never spelled out in the contract: the bank reserves the “determination” of the assessment at the end of the interest-only period, without any prior numerical formula. The borrower therefore cannot, when signing, measure the concrete risk. Second, the switch may occur long before the original term of the loan: eight years after taking out the loan, the borrower suddenly discovers that the monthly instalments are going to double or triple.

Why Can the Clause Be Classified as Unfair?

The first ground of cassation concerns the unfair nature of the clause. The rule is laid down by Article L. 132-1 of the Consumer Code, in its wording resulting from the Act of 4 August 2008 (which became, since the Ordinance of 14 March 2016, Article L. 212-1 of the same code): clauses are unfair where their object or effect is to create, to the detriment of the non-professional or the consumer, a significant imbalance between the rights and obligations of the parties to the contract.

The “Main Subject Matter” of the Contract Test

A clause relating to the main subject matter of the contract in principle escapes review of its unfair nature, provided it is drafted in a clear and intelligible manner. The Court of Appeal had held that the switch clause fell into this category: according to it, the clause clearly set out the financial consequences of the mechanism and specified the assessment criteria.

The French Supreme Court overturns this analysis by reference to the case law of the Court of Justice of the European Union (CJEU). Since the judgment in Kásler and Káslerné Rábai of 30 April 2014 (CJEU, C-26/13), it has been established that “the requirement that a contractual term must be drafted in plain, intelligible language must be understood as requiring not only that the term concerned must be grammatically intelligible to the consumer, but also that the contract must set out transparently the specific functioning of the mechanism to which the term refers, so that the consumer is in a position to evaluate, on the basis of clear, intelligible criteria, the economic consequences for him which derive from it”.

The Transparency Requirement According to the CJEU

The test is demanding. Grammatical clarity is not enough. The average consumer, reasonably well informed and reasonably observant, must be able, on reading the clause alone, to:

• understand the financial mechanism at stake;
• identify the precise threshold or thresholds that trigger the switch;
• assess the potential economic consequences, in particular the approximate amount of the monthly instalments after the transformation;
• gauge what they must do (top-up, additional payments) to preserve the maintenance of the deferral.

In the case discussed, the disputed clause referred to a mere “determination” by the lender, on the basis of the surrender value recorded at the 8th anniversary, without a formula, without a percentage, without a numerical threshold. As the Court stresses: “none of these elements showed that the borrower had been informed, at the time of subscription, of the threshold that triggered the transformation of the loan’s repayment conditions, on the basis of the surrender value of the life insurance policy recorded at the eighth anniversary of the loan, and thus how the mechanism worked on which the maintenance of the benefit of the 20-year deferred repayment depended”.

The failure to spell out the threshold makes the clause non-transparent. It loses its immunity as a clause relating to the main subject matter of the contract. Review of its unfair nature becomes possible again, and it has a strong chance of succeeding given the imbalance created for the borrower by the combination of:

• a power of discretionary assessment granted to the bank (“the lender determines”);
• the absence of numerical criteria enabling the borrower to foresee the outcome;
• a major information asymmetry as to the actual valuation of the financial assets.

What Duty to Inform Does the Bank Owe?

The second ground of cassation concerns the bank’s duty to inform, based on former Article 1147 of the Civil Code (which became Article 1231-1 since the Ordinance of 10 February 2016). The Court of Appeal had held that the bank had not breached its duty, since the contract informed the borrower of the impact of the valuation of the life insurance policies on the conditions of the repayment deferral.

The French Supreme Court also overturns this analysis, adopting a powerful formulation that must be quoted in full: “A financial institution that offers an interest-only loan providing that the credit may be transformed into a repayment loan before the expiry of the repayment deferral originally stipulated, depending on the valuation reached by the life insurance policies pledged as security, must provide the borrower with clear and intelligible information enabling them to make their decision prudently and in full knowledge of the risks inherent in taking out such a loan. It is incumbent on it, in this respect, to set out transparently the concrete operation of the proposed contractual mechanism, over its entire term, so as to enable the borrower to understand the precise criteria governing the maintenance of the benefit of the deferred repayment and to gauge, in particular, the impact on repayments of a level of top-up of the life insurance policies or of a significant depreciation in their valuation that does not satisfy those criteria”.

This formulation has a very broad practical scope. It requires the bank:

• to provide, from the outset, the precise criteria that will govern the maintenance of the deferral;
• to explain the numerical impact of an insufficient top-up or of a depreciation of the financial assets on the monthly instalments after the switch;
• to cover the entire term of the loan, including the intermediate periods of possible transformation;
• to enable the borrower to assess what they will have to do in concrete terms to preserve the transaction.

The Court of Appeal’s argument that the contract informed the borrower in general terms that the valuation of the life insurance had an impact on the deferral is rejected: that level of information is too general. The bank had to spell out the assessment criteria and the role of the additional top-up.

What Are the Consequences for the Borrowers Concerned?

The judgment of 25 March 2026 potentially opens up mass litigation. Between 2000 and 2015, tens of thousands of interest-only loans backed by life insurance policies were marketed in France, in particular for rental investment transactions. Many of them contain switch clauses drafted in terms very close to those struck down by the Court: “the lender determines”, “according to the conditions provided for by the contract”, without a numerical spelling out of the threshold.

For these borrowers, the decision offers two levers that can be combined:

• challenging the clause on the ground of unfair terms, with the consequence that it is treated as unwritten (and the switch is therefore legally neutralised);
• a liability claim against the bank for breach of its duty to inform, giving rise to damages covering the additional costs generated by the unforeseen transformation.

These two grounds can be combined. If the clause is deemed unwritten, the loan becomes a pure interest-only loan again, without a switch, which may require the bank to completely revise the amortisation schedule and refund the additional sums received. Liability for failure to inform makes it possible, in parallel, to compensate the loss suffered during the period in which the borrower has already borne the unjustified increase in instalments.

The judgment also follows on from the decision handed down on 15 April 2026 by the Commercial Chamber (No. 25-11.856) on limitation of the claim for breach of the duty to warn: the combination of the two decisions secures a time framework favourable to borrowers. Limitation of the claim for breach of the duty to warn runs only from the date the loan falls due; and the unfair nature of a clause can be invoked at any time, the unwritten nature of the clause being raised of the court’s own motion by the judge (CJEU, Pannon, 4 June 2009).

How to Build a Claim in Practice?

For the borrower faced with a switch to repayment status under a backed interest-only loan, several steps must be followed in order to build a solid claim.

Step one: obtain the entire contractual documentation. The loan offer, its appendices, the pre-contractual information sheet (which became the European Standardised Information Sheet (fiche d’information standardisée européenne) for mortgage loans granted from 1 October 2016), the general terms and conditions, any amendments and all correspondence exchanged with the bank must be gathered. It is on the basis of these documents that the analysis of the switch clause can be carried out.

Step two: analyse the switch clause through the lens of the transparency requirement. What are the thresholds? Are they expressed in numbers? Is the mechanism described in its concrete operation? Could the borrower, when signing, foresee the triggering of the switch? If an essential element is missing, typically the numerical threshold that triggers the transformation, the clause is probably non-transparent, and review of it as an unfair term becomes possible again.

Step three: establish the significant imbalance. Does the clause, by its very structure, create an exorbitant advantage for the bank? The lender’s discretionary power of assessment, the absence of numerical information, the harsh sanction where the threshold is not reached, and the absence of a gradual rectification mechanism are all indications of a significant imbalance to the detriment of the consumer.

Step four: quantify the additional costs. A comparison between the initial amortisation schedule and the post-switch amortisation schedule makes it possible to assess the additional cost actually borne. This quantification will support the claim for refund (where the clause is treated as unwritten) or the claim for damages (where there is a breach of the duty to inform).

Step five: identify other complementary means of action. The duty to warn can still be relied on where the borrower can be classified as non-sophisticated. Challenging the life insurance delegation, where the bank accepted during the loan transactions that emptied the pledged policies of their substance, may also give rise to a separate claim.

As regards residual avenues of compensation, it is worth recalling that the bank may also be pursued on the basis of its obligations under the RTS technical regulation of the European Banking Authority (Regulatory Technical Standards supplementing the PSD2 Directive on payment services): these technical standards impose monitoring and detection obligations for atypical transactions which are still under-used in banking litigation and which may, in certain cases, supplement the traditional grounds.

Conclusion: A Judgment That Enshrines the Requirement of Numerical Transparency

The judgment delivered on 25 March 2026 by the First Civil Chamber of the French Supreme Court clearly extends the European case law on the transparency requirement for contractual terms. It recalls that clarity is not reduced to grammar: it requires numerical criteria and an intelligible concrete operation. It also recalls that the bank, when it offers a complex product such as an interest-only loan with a switch clause, has a duty to spell out, from the outset, the precise conditions and the potential consequences of the mechanism.

For borrowers caught out by sudden switches during the term of the loan, this judgment reopens fertile litigation ground. The combination of grounds (unfair term, failure to inform, duty to warn) makes it possible, case by case, to challenge transactions whose profitability as advertised at subscription was merely illusory and whose mechanics ended up working against the investor.

The firm LE BOT Avocat regularly assists borrowers faced with failing interest-only loans or poorly anticipated switches to repayment status. A rigorous analysis of the contractual documentation, combined with a strategy of combined grounds, most often leads to a favourable outcome.

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