Ah this is one of my favorite PoDs.
A great many things could happen if Charles V converts to Lutheranism. First as above stated, Aragon and especially Castille would not be happy. However the Germany would like flock to him if it meant that they would be able to keep the money that traditionally went to the church in Germany. Now likely the Pope would declare him a heretic and would force the election of an Anti-Emperor. However by then Charles would likely have been able to rally much of Austria, Burgundy, Saxony, and Bohemia to his side along with much of Northern Germany. I sure a handful of states would remain loyal to Rome especially those with a vested interest against the Emperor. Iberia is a little more interesting, while it is true Iberia was largely devotely Catholic, I think that given their fear of the inquistion, if their King stood up and denounced the Catholic Church, many, again especially in Aragon, would rise with him. In anycase you're likely to see the out break of war in both regions. What would be quite interesting is would would then happen with Henry VIII?
One of the really important parts of this POD that you are missing is that Charles V would not be
converting to Lutheranism, he would simply be embracing Luther's proposed reforms of the Catholic Church. This is an important distinction because (I believe) if Charles V embraced these concepts it would be in an effort to get out in front of a about-to-be-prevailing trend. Part of the point of embracing Luther is to gain Imperial control over the Church, but in order to do that the structure of the Church needs to be maintained, ala Henry VIII's "reform" of England's Church.
I think a Charles V sans Spain would be willing to embrace these kinds of Lutheran reforms, seeing as he has the humanist background growing up in the Netherlands, and without Spain to worry about he would probably be looking for a way to gain more control over the HRE. Not being the King of Spain would also not terribly handicap him in the effort to become HRE, since his bid was financed by German bankers anyway (the wealth of the Americas having not yet arrived).
For Spain, how about that Portugese kid survives, so that all three crowns of Spain can be united by a single King? This is a family member, so Charles can maintain a German-Spanish alliance against France. I don't know how exactly he came to inherit the Italian possessions, but IIRC they were all inherited through the Spanish line. This will really help out the alliance with Spain, since Charles will be able to focus on the Northern France border and the Turks to the East, and with this reduction in strategic competition the embrace of Luther might even not stir too much emnity.
The reforms that Luther proposed were basically for the reduction of corruption within the Church, measures that were later carried out during the Counter-Reformation. If the reformer Luther is embraced by the Holy Roman Emperor during the height of corruption in Rome, isn't it possible that this will simply spur other royal attempts at battling corruption within their national churchs?