Securing finance for the acquisition of real estate is being developing constantly in Cyprus.
The financial institutions up to the year 2003 did not look upon financing for such purposes, as being an attractive proposition for them and the amount of the loans was around up to 50% of the purchase price and with a repayment period of around 7 years with a maximum period of 10 years. With the Banks being loaded now with cash deposits and with the lack of profitable and secure business ventures, the financial institutions have turned their attention towards the financing of real estate, which, now comprises the majority of their loans. With competition, being what it is now, there are several financial schemes offered, that are very attractive and with some minor differences on the whole.
Financing through Banks/Co-Ops etc are as follows:
- Buyer’s Contribution 20%-25% depending on the circumstances. For special, long standing clients with a good record, this could be reduced to only 15% own contribution (despite the Central Bank’s directions that the borrower should contribute around 30%).
- The repayment period is around 15 years but with a life insurance related loan, this could be extended to 35 years(+). It is a matter of age so that the repayment of the loan, will coincide the retirement age (+-63 years old) or the termination of one’s employment (whichever is the earlier).
- Some Banks are prepared to hold back the loan repayment for periods of up to 7-10 years with the borrower paying only the interest. The capital to follow. This is extremely helpful if one expects to have income increases in the future.
- The interest top-up is around 1.5%-2% on LIBOR (London Interbank Offered Rate), depending always on which currency you choose to borrow. If Cyprus pounds this will be 6%-6½% and if Euro 5.67%-6.17%.
- Some financiers have a penalty clause if the borrower pays the loan earlier than the stipulated date. You can discuss this with them however, since a number of Banks will forgo such a penalty if you insist.
- In addition to the interest, you must bear in mind other related costs which goes hand in hand with the loan such as:
- Life Insurance – You will need to cover the doctor’s check up say £100.
- Initial administration cost – This Bank charge could very from £500-£1500 depending on the loan amount.
- Legal documents – Some Banks could charge around £500 for documents.
The above applies to Cypriots and all E.U. members. In case of other nationalities the financiers are free to charge different rates (usually higher).
Other related to the acquisition/financing costs are:
Stamp duty for the sales contract and deposit the same with the Lands Office (if no title available).
This is based on the sales price recorded on the contract and which must be stamped within one month from the date of signing. If later you will be called upon to pay a penalty (the maximum period for depositing the contract is 60 days).
Stamp Duties:
- 1.5% on purchases up to CY100,000
- 2% on purchases over C£100,000
The penalty is set at £20 + 10% on the difference. E.g.: For £100.000:
- The payable duty is £150
- The penalty is £20
- Plus 10% of the difference (150-20)/10 £13
Total penalty payment £33
Transfer fees are charged on the date of the transfer and depend on the market value on the date of purchase (no interest addition).
If the contract is not deposited at the Lands Office, the Lands Office may adopt the market value on the date of the transfer. The transfer fees are scaled as follows:
- 3% on purchases up to £50,000
- 5% on purchases between £50,001 & £100,000
- 8% on purchases over £100,001
Mortgage Fees
Mortgage fees are set at 1% on the amount of mortgage.
So if you are securing a loan of £100.000 on a property purchase of £150.000, as a rough guide you will have the following costs:
- Life insurance £100
- Once and for all initial Bank payment (+/-) £500
- Stamp duties £250
- Transfer fees £4000
- Mortgage fees £1000
In case that you have no title to mortgage (e.g. under construction/no title even if it is completed) try to get a loan from the financing bank of the developer. If not you will then require a Bank guarantee by the registered owner (who will charge you at least 1.5% p.a. based on the guaranteed amount i.e. at least the amount of the loan). In case of the above example of the £100.000 loan, it will mean £1500 p.a. If you are using the developer’s financier (or not), seek a mortgage release from the developer from his own bank, stating that the bank will free from mortgage your own property, once the titles are issued. If the seller cannot provide such a bank release, we do suggest not to go ahead with the deal.
Independently of the above and notwithstanding the amount of available loan, do not depend on the possible income that the property will bring in, in order for you to repay the loan since returns are low (approximately 4%-6%) and vacant periods large, implying high maintenance cost. Holiday homes will bring no income to speak about (unless there are 3-4 bed villas in Paphos with pool etc let to holiday makers during the summer period which might bring a gross income of around £12.000 p.a.). It does not take much for one to have his financial planning upset either due to the business upset, health etc. So do not stretch your finances to the maximum since you run into financial problems, selling your property is not as easy as borrowing/buying. There is a theoretical, be it market price, on one hand and the time needed to sell which could reach 1-2 years. If you have financial problems you will soon note that the bank will cancel the mortgage after 3-5 instalment delays, it will seek repayment of the loan from the developer (who usually is a guarantor if no title) who will in turn cancel your contract. On this point we strongly recommend that your sales contract contains a proviso (in the event of no title) that you have the right to cancel the contract and re-sell to third parties, with the developer being obliged to enter into a new contract with the new buyer. If you do not have such a right and the developer refuses to release you from the contract, you will not be able to resell your property, even if you find a buyer – Bear in mind that in this case you must settle any capital gains tax and secure a tax release, so that the developer bears no additional costs – Cancellation fees should also be agreed with the developer beforehand and a reasonable fee is around £1500, plus your own tax costs. The use of a solicitor in such transactions is recommended, but, again, care is needed (refer to our articles on crooked and indifferent lawyers).
P.S. Do not forget the legal fees should you wish to use a lawyer. This should cost anything from £500-£1000 maximum, depending on the size and complexity of the contract. We are aware of multiple to the above charges hence our last paragraph above.
I am grateful to Antonis Loizou FRICS of Antonis Loizou & Associates Limited for allowing me to publish his articles on this website.
You can view the original article at: Financing of Real Estate Acquisitions
