Association of Cyprus Banks outlines options for borrowers facing higher rates

Borrowers with floating-rate loans will see their repayments rise following the European Central Bank’s (ECB) latest interest rate increase, although the impact will not be immediate, the Association of Cyprus Banks (ACB) said on Thursday.

The ECB raised its three key interest rates by 25 basis points, or 0.25 percentage points, earlier on Thursday as it sought to contain inflation and maintain price stability in the euro area.

The ACB said the timing and extent of any increase in a borrower’s monthly repayment would depend on the terms of the individual loan agreement and the type of reference rate involved.

A repayment would generally be adjusted at the next scheduled interest rate review date, rather than immediately after the ECB decision.

Depending on the reference rate, this could coincide with the period when the new ECB rates took effect or occur every three, six or 12 months, with Euribor and banks’ base rates among the relevant benchmarks.

The ACB said borrowers could determine which loans were affected and by how much by examining their loan agreements.

It identified three main categories of floating-rate loans, linked to Euribor, the ECB interest rate or a bank’s base rate.

The association said the size of any increase would depend on the outstanding loan balance and the remaining repayment period.

As an indication, a 0.25 percentage point increase on a €100,000 loan with 15 to 20 years remaining would increase the monthly repayment by approximately €12 to €15.

The calculation would work in reverse when interest rates fell, reducing monthly repayments accordingly.

The ACB said borrowers with floating-rate loans would be the most directly affected by the ECB’s decision.

It stressed that the type of interest rate, whether Euribor, the ECB rate or a bank’s base rate, played an important role in determining when and by how much repayments changed.

Borrowers with fixed-rate loans would not see their monthly payments affected while their fixed-rate period remained in force, the association said.

The ACB further stated that, according to the Central Bank of Cyprus (CBC), many borrowers had moved to fixed-rate loans for specified periods in recent years, such as three, five or seven years.

Banks had also offered existing customers fixed-rate solutions for several years during the previous cycle of interest rate increases in 2022 and 2023, in addition to offering fixed rates on new loans.

The ACB said it was not possible to determine with certainty whether the latest ECB increase would be followed by further rate rises or a pause in monetary policy tightening.

ECB decisions were based on prevailing economic conditions and the path of inflation, it said.

For borrowers already struggling with repayments, the ACB advised them to contact their bank before falling into arrears.

Possible solutions could include renegotiating the loan by extending its repayment period or converting it to a fixed interest rate for a specified period, among other options.

The association also provided an indicative example based on current conditions.

For a loan with an outstanding balance of €100,000 and an original monthly repayment of €750 at an interest rate of 3.50 per cent, a 0.25 percentage point increase would take the rate to 3.75 per cent.

The resulting monthly repayment would be approximately €763, representing an increase of around €13 per month, depending on the remaining repayment period, with about 15 years given as an example.