The move comes “too late to help those who bought property in Cyprus with home loans denominated in Swiss francs,” Nigel Howarth, editor of the Cyprus Property News website, observed, referring to the thousands of people who didn’t realise the risks they were taking on when they financed their Cyprus property purchases, at the height of a property boom there, with the Swiss currency.
As is well known by now, the franc strengthened substantially, at the same time that the Cyprus housing market collapsed, leaving thousands of investors with properties worth far less than the mortgages they are committed to paying.
The new EU legislation, known as the Credit Agreements Relating to Residential Property directive, covers mortgages on residential property; residential property that includes an office space; and building land. It was first proposed in 2011.
In addition to requiring that home buyers in the EU be better informed about the potential risks involved in any purchase they are considering making, the rules would provide for them to be “partly shielded against market swings that inflate their repayments” – such as occurred in Cyprus – “and better protected if they default” on their loans.
Some of the legislation’s requirements would be adapted to reflect differences among EU member states’ national mortgage and property markets, “but the information for buyers would have to be presented in a consistent format across the EU”, according to a statement on the Parliament’s website.
The statement noted that before the rules are finalised, MEPs are planning to fine-tune them, in order to "ensure that they are properly enforced" across the 28-nation bloc.
As currently envisioned, the new regulations would ensure that anyone signing up for a mortgage in the EU would receive information about comparable financing products available, and understand the total cost and long-run financial consequences of taking out the loan.
Credit terms offered to borrowers would have to match their current financial situation, and take account of their prospects and possible downturns.
Such EU buyers would have to be given a mandatory seven-day reflection period before signing the loan, or a seven-day right of withdrawal thereafter.
Last minute insertions by the MEPs considering the legislation included provisions to add flexibility – such as giving borrowers the right to repay their loan early, subject to possible conditions to be decided by EU member states, alongside providing for “a lender’s right to fair compensation for such early repayment”. Obliging borrowers to pay penalties for early repayment would be prohibited.
Under the new rules for loans denominated in a foreign currency, the borrower should be warned before signing the contract that the instalments payable could increase. Alternatively, the borrower could be allowed to change the currency, on certain conditions and at the exchange rate stated in the loan contract.
The MEPs also added a new rule stipulating that the return of collateral such as the property itself will suffice to repay the loan, "provided that the lender and borrower expressly agree to this in the contract".
Also, to address situations in which a borrower defaults on a property loan, the MEPs were keen to see the legislation include a requirement that the property be sold for the "best effort" price, and that it provide for the remaining debt repayments to be facilitated, “so as to protect consumers and prevent their becoming over-indebted for long periods”.
To read more about the legislation on the EU Parliament’s website, click here.