Since July 2022, lending rates in Cyprus have risen by 3.5%, putting borrowers in a difficult position with dangerously increasing loan repayments. Cypriot banks are now searching for ways to alleviate the situation, and they may have found a way to offer some "breathing space" to borrowers with mortgages.
The banks are expected to announce a measure soon that would provide borrowers who continue to make their payments with reimbursement of some amount at the end of the year. This measure would apply to housing loans worth up to 350,000 euros, linked to the Euribor or ECB base rate and are up to date. Some banks may continue to receive the installment at the set interest rate, but there will be a limit, and any payment above this will be returned to the borrower at the end of the year. The loan must be serviced normally before and after the announcement of this measure.
It is estimated that banks in Cyprus alone have 2 to 3 billion euros in mortgages that meet the criteria for this reimbursement measure, excluding loans from credit purchasing companies. We can expect an announcement about this measure in May, with pressure from the Ministry of Finance to keep the Cypriot economy in good shape. However, not all banks may announce this measure as it may not fit their lending profile.
If any such measure is taken, banks must inform the domestic supervisor, and if needed, seek approvals from authorities outside Cyprus. The extent of this measure and its implementation will depend on the banks' decisions in May.
In the near future, we can also expect an increase in the US interest rate by 0.25% on May 3, and an increase in the European rate on May 4, which is likely to be either 0.25% or 0.50%. This increase may affect borrowers with loans linked to Euribor and the ECB base rate. Analysts believe this may be the last interest rate increase. The ECB has raised interest rates in six consecutive monetary policy meetings to control inflation and bring it within the acceptable 2% limit, but the increase has not had a significant impact on economies. The Consumer Price Index in March 2023 in Cyprus increased by 1.15 points compared to February 2023, with an inflation rate of 5.8% in March 2023 and 6.5% for January-March 2023 compared to the same period last year.
The reimbursement measure for borrowers may act as an incentive for borrowers to continue to service their loans, but banks may still face a new wave of Non-Performing Loans (NPLs). NPLs in January 2023 slightly increased to 2.32 billion euros compared to December 2022. Many borrowers have complained about the increased mortgage payments since July 2022, ranging from 100-400 euros, putting them under pressure. Borrowers are in a deadlock, wanting to continue servicing their loans but unable to pay the increased installment until the end of the year when they can receive the reimbursement.
There is also much discussion about deposit rates, but it seems that only large depositors are likely to benefit. Vulnerable and middle-class depositors may not benefit from the measures on deposit rates. Nonetheless, the increases should be slightly in line with increases in lending rates.
[This article was translated from its Greek original]