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Banks in Cyprus are considering increasing housing loan interest rates of in light of the tough conditions in the sector and the increased risk in the Island’s property market.

The liquidity condition in the domestic and European market keeps the cost of deposits high, forcing banks to readjust their lending rates.

The ECB rate cuts are no longer popular in the domestic lending market in Cyprus, which still suffers from the uncertainty from the Greek crisis.

The changes in the interest rate policy of the banks affect the existing loans rather than the new since banks avoid new exposures to housing credit.

Even in cases that a household’s income is regarded as stable, banks are still hesitant, causing difficulties to the property market, where activity returned to pre-boom levels.

In the past six months, housing loans to Cyprus residents have fallen to €12.2 billion.

Reluctance to grant new housing loans is more intense now than in 2009, when economy was in recession again.

Total housing loans to Cyprus residents in 2009 was  €1.9 billion while in the first eleven months of 2011 they did not exceed €0.3 billion.

Avoiding new lending, banks turned to the existing housing loans and started preparing their customers for new interest rate increases.

A bank letter to customers said, "Due to the negative developments, we are forced to proceed with a new increase in the rate margins for loans allocated pursuant to the provisions of the relevant contracts”.

Similar moves are made by other banks with increases that might reach 55 base points.

Lending conditions will deteriorate in 2012 due to the capital challenges that the banks face.

Bankers expect that both offer and demand of housing credit will decrease in 2012, increasing pressures on the property market.

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