Borrowing to buy an apartment is affordable, but comes with risks in the long run

The real cost for a couple buying an apartment remains low – a trend that started in 2012 and continues – since the occasional rise in apartment prices was absorbed, to an extent, by the low interest rates for housing loans and subsequently the cost of debt.

WiRE FS has conducted the very first relevant research for the Cypriot market. The research has found that the current cost for a couple buying an apartment remains below international benchmarks. The relevant Financial Affordability Index (FAI) the company created stands at 70 and the available yearly income after the cost of debt (loan interest) at €34,049.

In drawing these conclusions, the company’s analysts considered the cost of an apartment (based on the RICS price index), the average salary in Cyprus according to Cystat (Statistical Service of the Republic of Cyprus), and the interest rates on mortgages according to the Central Bank of Cyprus.

Indicatively, in mid-2020, the average cost for buying an apartment stood at €125,227. The average monthly salary in Cyprus – not the median – was calculated by Cystat at €1,500. The average interest rate on mortgages for the same period, according to data from the Central Bank of Cyprus, was at 2.08%. The company assumed that the loan for buying an apartment would be at 75% of its value and thus interest rate costs would amount to €1,951 annually. This leaves an average couple with a net income of €34,049, which means that the relationship between the apartment’s value and the couple’s yearly salaries, after interest, stands at 3.7 (the closer to 3 the lower the cost; the closer to 5 the higher the cost – see the table) and the FAI stands at 70. For comparison purposes, at the start of 2010, FAI was at 100, both because apartment prices were significantly higher (€160,697) and interest rates on mortgages were higher (4.43%), leaving a couple earning the median salary an available net income of €30,661.

FAI was at its lowest, i.e. its most affordable, during 2015-2016, when the average apartment price was around €100,000 and interest rates fell below 4%. From 2016 and onwards, while apartment prices followed an upward trajectory, the real cost for a couple to acquire an apartment increased only moderately because the increase in apartment prices was partially offset by the decrease in interest rates.

Today, a couple who each takes home a monthly salary of €1,500, buying their own apartment is financially feasible and affordable, provided, of course, they can make the down-payment of 25% of the property’s value. The main reason is the lower mortgage interest rates, which between 2012 and 2020 fell from 5.5% to about 2%. With buying an apartment becoming relatively easy in recent years, several couples decided to buy one, either for private use or for investment purposes.

In the last few months, the relevant government scheme subsidising interest rates on mortgages has given a boost in such transactions. Households that have increased their debt exposure, hope or believe that interest rates will remain stable in the long run. However, given that most mortgages have a duration of more than 15 years -banks advertise up to 30 years– and with interest rates at a historically low levels, the only way forward is upwards, which means the relevant cost and risk for households will increase.

Those who have moved towards this direction should try to accelerate payments in order to significantly lower their mortgage as soon as possible, before interest rates increase and, by extent, the cost of their mortgage loan.