Lower in­ter­est rates, real es­tate and non-per­form­ing loans

Financial Mirror (Cyprus) - - FRONT PAGE -

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.

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