Selling a Mortgaged property
In Cyprus, you can sell any real estate property as long as the following conditions are met: the price corresponds to the market value, and all the necessary documents are in order. The same rule applies to mortgaged apartments. However, there are a couple of distinctive nuances we will tell you about in this blog. And while we're at it, let's also review the current situation in the mortgage lending sector.
How Does Mortgage Work in Cyprus?
As of today, a mortgage remains one of the most popular ways to acquire property on the island of Aphrodite. This applies not only to the local population but also to foreign investors. The only difference is that investors who do not work and do not reside permanently in Cyprus contribute more than 50%, and sometimes even 60%, of the total property value. For local residents, the minimum down payment is 20%. A 1% fee of the property value is paid to the state for mortgage registration. Among other significant expenses are property insurance against extraordinary situations, life insurance for the borrower, and, if necessary, legal support for the transaction.
The minimum interest rate for a housing loan today is 1.8%. According to new rules in 2023, when calculating the total amount of the monthly payment, you should add the floating rate of the European Central Bank (ECB). In the past six months, it has been approximately 3.5%. However, as of September 14, the ECB increased the rate by 25 basis points, reaching a new historical high of 4.5%. Experts believe that further rate hikes are not expected, but they may reduce it in the event of an economic slowdown.
When arranging a mortgage, the same rules apply as in a regular purchase. For the first home in a new building, VAT on the first 200 square meters is 5%, unlike the standard 19% in Europe. When buying secondary housing, you need to pay a Transfer Fees tax, which is linked to the price of the specific property but is significantly lower than VAT. A standard calculator is used to calculate it. If the transaction is not subject to VAT, the legislation provides for a 50% exemption from the transfer fee. This exemption is not taken into account by the calculator. You can further reduce the amount by increasing the number of owners.
Selling a Mortgaged Property
To sell a property purchased with a mortgage, you need to be the owner of the property. Therefore, the fewer owners, the faster the process will go. When you buy a property on a mortgage, you effectively become the owner of the property pledged to a credit institution, i.e., the bank. During the registration, the new owner requests two original Title Deeds, the main ownership certificate, one for themselves and one for the bank that provided the loan.
However, without the bank's knowledge, the owner cannot sell or carry out any other financial transactions with the property on legal grounds. As long as the debt is not fully paid off, the property remains pledged. The seller must notify the credit institution in advance of the intention to sell the property, request a letter indicating the remaining debt and a list of documents stored there.
The bank will make a calculation to determine the amount that needs to be paid to close the loan. The new buyer sends a request to the bank to close the loan. At this stage, a preliminary Sale Agreement is drawn up, specifying the amount of the outstanding loan.
The day before the transaction, the bank representative provides a banker's draft – instructions for transferring funds to the bank account. When the money is received, the bank hands over the corresponding Certificate of No Debt and all property documents. On the same day or at another convenient time, the property sale transaction is completed, supported by a contract.
On the appointed day, the seller, buyer, and, if necessary, a bank representative visit the Land Department for the transaction. The buyer can either pay off the mortgage or continue to pay it, transferring it to their name (which extends the processing time for selling a mortgaged property). In the first case, part of the money goes to the seller, and part to the bank. The mortgage is paid off (sometimes with a small penalty for early repayment). The second option takes a bit longer, as it requires the preliminary completion of paperwork and, in the case of foreigners, obtaining permission to purchase from the Cyprus Council of Ministers. Furthermore, before the transaction, the seller must settle all debts and obtain a Tax Clearance Certificate.
Thus, after the transaction is approved by the lending institution, part of the payment goes into the bank account, and the rest to the seller. If the property's value has increased during the ownership period, the seller earns a profit.
It's important to note that when selling property in Cyprus, a capital gains tax of 20% is payable on the value stated in the contract. This is why many buyers prefer to invest in off-plan projects and resell them at the final stage of construction when apartment prices have risen by 30-40% or more from the initial cost. Additionally, for the first 10 years of owning a newly built property, the owner enjoys a reduced VAT rate of 5%. If the property is sold within the first 10 years, the owner must pay the full 19% VAT rate for the remaining years until the end of the specified period. Therefore, when considering investment purchases through a mortgage, it's essential to choose projects carefully to make the most of your investment.
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