The European Central Bank’s Governing Council meets on October 28 and 29 to set interest rates. Some policymakers are open to a 25-basis-point rise, from 2.50 per cent to 2.75 per cent, because of inflationary pressure from energy prices. Most analysts and markets, however, expect the ECB to wait until its December meeting, when it will have more economic data.
Any rise would come as mortgage rates in Cyprus sit well below the levels seen at the height of the 2012 banking crisis. For young couples trying to buy a home, the main obstacle has shifted from the cost of borrowing to soaring prices for property and building materials.
What borrowers pay now compared with 2012
Take a typical 200,000-euro mortgage repaid over 25 years. At the 2012 rate of 5.50 per cent, the monthly instalment was 1,228 euros, and by the end of the term the borrower had repaid 368,400 euros, including 168,400 euros in interest.
At today’s average rate of 3.24 per cent, the instalment is 974 euros and the total cost of the loan is 292,200 euros, including 92,200 euros in interest. Today’s borrowers pay 254 euros a month less and save 76,200 euros in interest compared with those who bought in 2012.
Borrowers who took out loans or were on variable rates at the peak of the inflation crisis in 2023 saw their instalment rise to 1,146 euros, at a rate of 4.80 per cent. The fall in the average mortgage rate to 3.24 per cent leaves them 172 euros a month better off.
Divided views at the ECB
Ahead of this week’s meeting, some of the Governing Council’s more hawkish members insist the fight against inflation through higher rates should not be abandoned halfway. German central bank governor Joachim Nagel said recently that he was open to another rise.
Latvian central bank governor Martins Kazaks said inflation was almost double the ECB’s 2 per cent target and that further tightening may be needed, signalling a rise without saying whether it should come now or later. He also noted that rising rates could reduce liquidity and so help contain inflation.
Slovenian central bank governor Primoz Dolenc said that if markets continued to tighten financing conditions, the ECB would not need to do much more. French central bank governor Emmanuel Moulin also suggested that markets could do part of the ECB’s work against inflation by pushing up borrowing rates.
Market participants considered it likely that the ECB would not want to use up all its ammunition against inflation now, particularly as it had been the first central bank to start raising rates this time. It would instead give itself time to measure the effects of its policy before deciding its next step.
2012 to 2015: the cost of risk
In 2012, with Cyprus’s banking system in turmoil, borrowing was a luxury few could afford. Rates on new mortgages exceeded 5.00 per cent, shutting a whole generation out of the property market.
For small and medium-sized businesses, borrowing costs reached 6.00 per cent. Banks weighed down by non-performing loans (NPLs) effectively stopped lending, stifling any attempt at growth.
2016 to 2021: near-zero rates
The ECB responded to the crisis with quantitative easing, and for five years the market became used to borrowing at almost no cost. Between 2017 and 2021, the average mortgage rate in Cyprus fell to historic lows of 2.00 to 2.50 per cent. Demand for new loans surged as money came to be seen, for the first time, as almost free.
The average rate on large business loans of more than 1 million euros fell to close to 3.00 per cent, allowing companies to restructure debt and restart major developments.
2022 to 2024: inflation returns
Cheap money came to an end in 2022, when the energy crisis and inflation forced the ECB into the most aggressive rate rises in its history. Within 18 months, mortgage rates climbed back above 4.50 to 5.00 per cent.
Thousands of borrowers on variable rates saw their monthly instalments rise by hundreds of euros, putting households under strain. Financing costs for small and medium-sized businesses jumped to 5.50 to 6.00 per cent, again freezing investment plans.
Why Cyprus is less exposed today
The past 15 years point to two conclusions. First, Cyprus is no longer the weak link. In 2012, it borrowed at a large risk premium compared with the rest of Europe. Today, the average mortgage rate in Cyprus, at 3.24 per cent, is below the European average of 3.54 per cent, reflecting the stabilisation of the local banking system. Cypriot banks hold excess liquidity, which allows them to absorb shocks without immediately passing every ECB rise on to customers.
Second, borrowers have changed their habits, turning away from the variable rates that trapped them in 2022. The vast majority of new mortgages are now taken out at a rate fixed for the first three to five years, protecting households from inflation and further rate rises.
