Lower interest rates, real estate and non-performing loans

The island’s major financial institutions have lowered their interest rates significantly, by 2 per cent to be exact. So, an existing housing loan has seen a 2% decrease in the rate, i.e. from 4.75% to 2.75%.

This is a serious reduction which has not yet received the appropriate attention by many.

What will be the repercussions to the real estate market but also the economy in general?

- A reduction of interest rates and instalments for existing loans – translating into a lighter burden for clients;

- Potential loan seekers will now be encouraged to apply for one due to lower rates;

- By lowering rates, banks send the message that the banking sector is now much healthier and can stand on its two own feet. This is also a huge confidence boost for buyers;

- The decrease of savings rates by 2% might lead some investors to invest in real estate instead of being taxed 30% on their savings rates;

- It is estimated that lowering interest rates will inject an extra EUR 300 mln in market liquidity; and,

- The decrease will aid restructuring of non-performing loans (NPLs) and boost liquidity.

Let us present an example to better explain the positive ramifications for buyers:

A young couple is buying a new 2-bedroom flat for EUR 125,000. They pay 25,000 up front and get a loan for the remaining 100,000. The instalment for this loan at 2.75% interest rate and a repayment period of 25 years is 465 euros a month. This amount is about the same as the rent they’d pay for the same flat.

It is easily understood that with both wife and husband employed, the instalment of 465 a month is not prohibitive.

A month ago they would have paid 577 euros for the same loan just because of the higher interest rate.

I remain optimistic but prefer to be a realist at the same time.

The interest rate reduction

will be beneficial to market liquidity, investor psychology and the real estate market, but has to go along with a reduction of the non-performing loans.

To reap the benefits of lower rates all the alarmism, populism and overreaction on the issue of the insolvency legislation must stop.

We must pay attention to resolving the non-performing loans issue, without banks having to resort to extreme measures and risk causing social unrest.

Political parties must allow banks (by voting the relevant legislation) chase the mega borrowers who do not service their loans. We must not allow seven developers, five politicians, three ex-bankers and one union to enforce the island’s monetary and banking policy.

Non-performing loans weigh in heavily on the country’s economy and must be prudently managed if the lower interest rates are to achieve their intended purpose.