TENS of thousands of Britons who bought into the dream of owning a property in the sun face repossession and ruin after their "low cost" mortgages turned sour.
They were sold a vision of sun-kissed beaches, world-class golf courses and the "best place to invest in property in the world". But the Greek debt crisis has sent their mortgage payments soaring and many fear that they will be forced to hand back their keys or lose their UK home if they are pursued for money that they owe.
The borrowers' mistake was to follow advice to buy in Cyprus with a mortgage denominated in Swiss francs. Their plight is a harsh reminder of the dangers of opting for a property loan in a foreign currency. Mortgage repayments and the loan value in sterling fluctuate with currency movements. If exchange rates move the wrong way, the costs can balloon with frightening speed.
Swiss franc loans were sold to tens of thousands of Britons and locals by Cypriot banks and their agents in 2007 and early 2008, at the peak of the island's housing boom.
Sarah Hordle, a Cyprus mortgage expert at Essential Consulting, says: "It was very easy to open an account with a bank and Swiss franc mortgages were offered as standard. Many people who bought at the time never even came to Cyprus as bankers and lawyers were flown over to the UK by agents."
The loans were an easy sell as the interest rate was much lower than that available in the Cyprus pound (which became the euro in January 2008) or sterling. Borrowers were asked to pay about 8 per cent on mortgages in Cyprus pounds or Euros while Swiss franc loans offered rates of about half that.
But in the past three years the Swiss franc has nearly doubled in value. Cypriot property prices have also tumbled, trapping those whose only hope is to sell. For borrowers like Ian Boorer, from Plymouth, Devon, the jump in payments has been crippling. He and his wife bought an apartment off-plan in spring 2008 in a golf-course development close to Larnaca.
They were advised by Ellesmere Property Group to take out a Swiss franc mortgage with Alpha Bank Cyprus. Like many loans at the time, this included an initial period, in their case three years, during which they did not have to make any mortgage payments. They were told that when payments did commence, these would be about £680 a month. However, the exchange rate moved against them, so their first payment, three months ago, was £1,100.
Mr Boorer, a 45-year old seismic survey engineer, says: "Our mortgage payments are much higher than we ever planned for and there doesn't seem to be any way out. We have talked about switching to a euro mortgage but that is going to be difficult because we are in negative equity as property prices have been falling and there are big charges for switching."
With hindsight, borrowers piled into Swiss franc mortgages at exactly the wrong time. Cyprus' housing boom occurred just before the credit crisis struck, which caused the Swiss franc to appreciate against currencies worldwide as investors sought to benefit from its reputation as a safe haven in times of crisis. It continued to strengthen as the eurozone problems intensified, which resulted in riots in Greece this week. In July 2007 the pound was worth SwFr2.49. Now it is valued at SwFr1.35, and currency experts say that the trend shows no sign of reversing soon.
Michael Derks, the chief strategist at currency trading broker FxPro, says: "It is said that quality rises to the top, and in the foreign exchange market it is the Swiss franc that is top quality these days. Notwithstanding its meteoric rise, it is difficult to see what might prick the Swissie's bubble in the near term."
As the Swiss franc has appreciated, the repayments on mortgages have risen in sterling terms. You would need £400 to cover a monthly repayment of SwFr1,000 at an exchange rate of SwFr2.50 to the pound. At SwFr1.35 to the pound, your sterling repayment would be closer to £740 a month.
The franc's appreciation has also increased the sterling cost of debt. A SwFr100,000 mortgage would be worth about £40,000 at SwFr2.50 to the pound. With the franc at SwFr1.35 to the pound, its value will have increased to about £74,100.
Paul and Penny Newman, from March, Cambridgeshire, used a Swiss franc mortgage from Marfin Laiki bank to buy a two-bedroom villa in the village of Lania in January 2008. They started by owing SwFr160,000, which was the equivalent of £75,000. They have since paid off SwFrF7,000 but their loan in sterling has mushroomed to £115,000.
Paul, 56, a security supervisor, says: "If it was down to my wife, we would just leave it and walk away but there would still be the worry that the bank would pursue us, which, of course, they would be entitled to do."
Their fate is a warning to anyone using a mortgage to buy a property overseas. Charles Purdy, of Smart Currency Exchange, the foreign exchange specialist, says: "In most cases we would suggest arranging your mortgage in the currency that you are buying the property in. That avoids the problem of your mortgage liability increasing relative to the cost of your property. At no time should you take out a mortgage in another unrelated currency."
The plight of the borrowers has been heightened by the collapse of the Cyprus property market. According to the Royal Institution of Chartered Surveyors, apartment prices fell by an average of 11.2 per cent in 2010, while house prices fell by an average 7.4 per cent. In popular resorts the slump has been even more severe. The worst-hit areas were Paralimni and Famagusta, where apartment prices slumped 23.2 per cent, and Larnaca, where house prices fell by 13.2 per cent.
Nigel Howarth, of Cyprus Property News, says: "Many developments were targeted at the British market and demand has virtually collapsed so there is great difficulty in selling."
The banks have made matters worse by increasing margins and forcing up the costs. Many mortgages are linked to Libor, the interest rate at which banks lend to each other. In 2007 and 2008, when the bulk of the Swiss franc mortgages were sold, most rates were pegged at 1.5 points above Libor, but some are now charging nearly 5 per cent over the inter-bank rate.
Some borrowers can't take any more. Ms Hordle says: "People are handing back keys every day and the first repossession cases are going through the courts."
But that may not be the end of the borrowers' problems. Banks can pursue money through the courts in Cyprus and the UK, putting the debtors' assets, including their homes in Britain, at risk.
Some homeowners are considering legal action against the banks and their agents because they believe that they were mis-sold. Ben Cook, 34, from Malvern, Worcestershire, says: "It is obvious in hindsight that taking out a loan in Swiss francs to be repaid in euros or sterling amounted to financial suicide. We were badly advised and mis-sold in our dealings with the agent in the UK, Alpha Bank in Cyprus and our solicitors in Cyprus, although we don't hold out much hope of getting redress."
Many companies involved have disappeared or gone bankrupt, making claiming compensation very difficult. Mr Cook was advised to take out a mortgage in Swiss francs by a company that became Optimum Overseas Investments Ltd. The Times tried to contact the company but its phone line and e-mail address are dead and it is not registered with Companies House. The banks also argue that the risks were pointed out. Alpha Bank says: "In the cases that the clients decided to apply for a mortgage loan in Swiss francs, they were asked to sign all the relevant legal documents, including declaration letters acknowledging that they fully understand the risks involved in borrowing in Swiss francs."
Bank of Cyprus says: "Bank of Cyprus would have made the customer aware of the possible risks of borrowing in a foreign currency."
But Chris Christofi, of Healys, a company of solicitors in London, believes that there may be grounds for action. He says: "It seems that a fair proportion of mortgage applications were submitted by intermediaries, usually the developers or their agent in Cyprus, and many of these included false information as to the amount of deposit paid, earning ability and so on. We are looking at using this as a basis for having some loans declared void.
"The biggest problem is convincing the banks in Cyprus who have given mortgages in Swiss francs that they should perhaps revert to sterling/euro-style mortgages backdated to the commencement of the loan because I think many people would be happy with that."
Anyone who buys a property overseas should remember some basic rules. Always seek specialist advice from independent solicitors and surveyors before buying. Some developers will wheel out lawyers who they claim are independent, but you should find your own. If you don't speak the language, make sure all the paperwork is translated into English by a reputable translator, preferably one who can compensate you for any material inaccuracies. To find a lawyer proficient in the law of your chosen country you could contact The Law Society (lawsociety.org.uk).
Case Study: 'I owe more now than I started with'
Peter Thompson, a boat pilot on the Thames, regrets the day that he decided to buy a two-bedroom holiday home in the Cyprus resort of Pernera with a Swiss franc mortgage. He says: "The mortgage was recommended to me by the personal banker at the Paralimni branch of the Bank of Cyprus because the interest rate was so low compared with a euro mortgage. They said that the repayments could fluctuate with exchange rates but they didn't really emphasise the potential risks. In my wildest dreams I never imagined what would happen."
The 53-year old, from Beckton in London, bought the property in June 2007 with a loan of SwFr 238,000. At the time you got 2.5 Swiss francs to the pound. Four years on, the Swiss currency is 1.35 to the pound, which has had terrible consequences for Mr Thompson. He says: "I've made nearly £50,000 worth of payments but, when you convert what I owe in Swiss francs back into sterling, I owe nearly £15,000 more than at the start."
Mr Thompson has talked to the Bank of Cyprus about switching to a euro mortgage but has been told that he will have to pay hefty exit penalties. "It has become a millstone round my neck," he says.