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15th August 2022
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HomeLegal MattersEU blocks 'generous' mortgage-to-rent scheme

EU blocks ‘generous’ mortgage-to-rent scheme

Brussels has told Cyprus to hold its horses over a fresh attempt to throw another lifeline, a mortgage-to-rent scheme, to distressed borrowers to help them keep their homes and small businesses.

Nicosia had been preparing a mortgage-to-rent scheme to cover non-performing loans collateralised by primary residences and businesses, mainly SME premises, with a value up to €350,000.

However, as conveyed to the Finance Ministry, Brussels has demanded that the scheme only cover borrowers with homes worth under €250,000.

The Directorate-General for Competition (GDA) of the European Commission has rejected the government’s plans to expand the scheme to cover loans collateralised by primary businesses.

According to EU Commission sources, quoted by news site Stockwatch, based on the standard of living, market data and the real estate value, Cyprus’ request to bail out borrowers defaulting on loans collateralised by property over €350,000 is not justifiable.

The GD for Competition reportedly argued it could not accept that a low-income family could own a home worth more than €350,000 and be entitled to state aid.

On the protection of professional property, Brussels technocrats explained to the Finance Ministry it went against basic rules of state aid and fair competition.

They pointed out that the state can’t subsidise the loans of companies that did not meet their instalments, helping them to remain in the market, competing against firms consistent with their loan payments.

Given the rejection, the Finance Ministry is going back to the drawing board, tweaking the scheme, and submitting it for approval in July.

According to its initial design, the scheme has a contractual value of €3 billion.

The Finance Ministry’s request to the European Commission involves the transition of the state-owned Asset Management Company (KEDIPES), the former Coop Bank, to a bad bank entity which will be given the authority to absorb toxic loans from other institutions.

If approved, KEDIPEs will launch a call to all banking and credit acquiring institutions to pass on toxic loans through a mortgage-to-rent scheme.

Beneficiaries will be people belonging to low-income groups and pensioners, regardless of whether they had applied to join the ESTIA scheme or not.

The program will also include borrowers who have defaulted on their mortgage but saw their application for the ESTIA scheme rejected, as they were classified as unviable due to their low income.

The plan is for KEDIPES to acquire the properties tied to the mortgage at 50% to 60% of their current value.

This way, the debtors would maintain occupancy of the property but not its ownership.

In exchange, the outstanding debt would be written off.

Borrowers will then be given the option to stay in the property, paying rent equal to 2% or 3% of its market value.

Rent will be adjusted annually based on a formula to be decided, while borrowers will have the option of state aid in case of any increases they cannot meet.

It will entail a 15-year payment duration, while borrowers could submit a proposal to acquire the property after five years.

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