Despite continuous interest rate cuts by the European Central Bank (ECB), many borrowers are not seeing a reduction in their monthly loan repayments. This phenomenon has raised concerns, with some questioning whether banks are correctly applying the rate cuts or if there are errors in the calculations.
Speaking on the Sigma TV programme “Mesimeri kai Kati”, Cyprus Banks Association Spokesperson Andreas Kostouris explained why the drop in interest rates does not immediately translate into lower loan instalments. He stated that this is mainly due to the way interest rates are adjusted, which depends on the terms of each borrower’s loan agreement.
How loan interest rates are adjusted
According to Kostouris, mortgage loans may be linked to the ECB’s interest rate, the interbank EURIBOR rate, or the banks’ base rates. This differentiation is crucial in determining when a loan’s monthly instalment will be affected.
EURIBOR and delayed reductions
Most loans in Cyprus are based on EURIBOR (three-month, six-month, nine-month, or annual), which is adjusted according to the period specified in the loan agreement. This means that, although the ECB has cut interest rates six times since last summer, the reduction is not immediately applied to all loans. For example, if a borrower’s loan is linked to the six-month EURIBOR, their instalment will only be adjusted once the six-month period is completed.
Kostouris explained that in the case of a loan directly tied to the ECB’s interest rate, the instalment would increase or decrease in the same month that the rate change is announced, without delay.
What happens with bank base rates?
For loans based on banks’ base rates, reductions tend to follow a slower pace, as they depend on the average deposit rates of the previous quarter. This means that some borrowers who did not experience immediate increases when interest rates rose may now also face delays in seeing reductions.
Checking your loan agreement
It is crucial for borrowers to understand the type of interest rate they have agreed upon with their bank. This information is stated in the loan contract, which can be retrieved from the bank if lost.
According to Kostouris, the agreement is a straightforward document, though it may be lengthy. “On the first page, a table clearly states key details such as the type of interest rate and how often it is adjusted, along with other contract terms. For instance, a borrower with a fixed-rate loan for the first five years will see no increase or decrease in their instalment during that period,” he explained.
What if there’s an error in the calculation?
If a borrower suspects that their loan instalment has not been calculated correctly, they should first contact their bank. If they do not receive a satisfactory response, they can file a complaint with the Central Bank of Cyprus, the Consumer Service of the Ministry of Commerce, or the Financial Ombudsman, who handles out-of-court resolutions of banking disputes.
Banks working to restore trust
Kostouris emphasised that banks are making efforts to restore transparency and trust with their customers.
“Gradually, banks are trying to rebuild an atmosphere of trust and familiarity with their clients,” he said, encouraging borrowers to communicate directly with their bankers to obtain necessary clarifications and gain a complete understanding of their loan situation.
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Source: Economy Today
