By Savvas Savvides
THE MORTGAGES based on Swiss francs concern a substantial portion of purchasers of residential property in Cyprus. These mortgages were offered by Banks in the period 2006-2009, and were portrayed as financial products with great benefits for borrowers.
First of all, as part of our analysis of the mortgage contracts, we have to analyse what the Swiss franc actually is, its origin as well as its advantages. The Swiss franc is the currency of Switzerland and Liechtenstein.
It is the sole remaining version still issued and used in Europe. The name of the franc in the four official languages of Switzerland is –Franken (German), Franc (French), Franc (Romanian), and Franco (Italian). The telemetric franc replaced the various currencies of the Swiss cantons.
The Banks were then promoting this new financial product as a formula for the residential mortgages due to its low interest that was as much as 50 per cent lower by comparison to the respective mortgages in euro.
The recent progress of the parity of the franc with the euro took thousands of borrowers by surprise who had signed mortgages, mostly residential, in Swiss francs.
The decision of the Central Bank of Switzerland to set a minimum exchange rate of 1.20 of the Francs’ parity with the euro caught both the borrowers and the banks unawares.
As a result, this created a harsh social situation and was a serious blow suffered in particular, by the borrowers of the residential Swiss mortgages at a time of financial crisis.
The disappointing results of mortgaging in Swiss francs in recent years – compared to what the banks had been promising – and more precisely the change in the exchange rate and the fluctuation of the interest rate, is an issue that remains to a great extent, untouched by the state which has not yet confronted this issue or clearly expressed its views on it.
However, the European Court, with a recent decision took a stand in the case of Hungary.
It ruled as excessive and invalid the condition of the mortgage agreement in Swiss francs under which the debtor is obliged to repay his obligations to the bank in euros by repaying the amortisation instalments as per the current sale price of the currency on the date of the payment of each instalment, and not as per the selling price on the date the mortgage agreement was signed.
The European Court has examined many aspects which were instrumental in its decision to declare null and void the agreements which have been signed between the bank and the borrowers in Swiss francs.
I will not proceed to a comprehensive analysis of all the aspects, but I will mention one characteristic example which concerns the absolute failure of the banks to inform the borrower of the risks of signing the agreement in a foreign currency.
It was the banks’ obligation, before signing the contract, to give the borrowers concrete examples and calculations of the charges relating to the changes of the parity and the fluctuation of the interest rate, and to describe hypothetical scenarios regarding the importance of currency risks in determining the overall performance and benefits of the agreement.
Moreover, the bankers that were promoting and drafting the specific mortgage agreements were obliged to inform the borrowers of the hidden risks in the terms of the mortgages so as to enable the ”average reasonable man”, without financial expertise, to be in a position to fully understand the terms of the contract he was about to sign, including the responsibilities he was thereby undertaking, and hence take an informed decision as to whether he was in a position to fulfill them.
The banks, unfortunately, chose to focus only on the fact that the specific agreements were more favourable when compared to others vis-a-vis the low interest rate.
They failed to explain how the conditions of the mortgage agreements were subtly designed to work, gradually, in favour of the banks, and, in particular, what effects the mortgage terms would have with regard to the amortisation instalments, which would increase throughout the duration of the mortgage.
The bank, on constituting such a mortgage, ought to have investigated on each occasion the potential of the natural hedge of the risk, that is to say the source of the income of each and every borrower and whether he possessed an income in Swiss francs.
The necessity of such an investigation arises from the fact that if a borrower does not possess an income in Swiss francs, then, as protection for the borrower, the bank should grant him the right to financial coverage via appropriate insurance products to compensate for the currency risk.
The European decision regarding mortgages in Swiss Francs is a crucial res judicata for borrowers, and it is one of the strongest weapons in the borrowers’ arsenal in their effort to alleviate the burden of debt which they are facing.
In view of the fact that the Greek courts attended to the needs of the borrowers (after taking into consideration aggressive banking practices), the decision of the European, Court dated April 30, 2014, and the order of the European Parliament and the Council, No 2014/17/EE, is per se a defence in favour of the borrowers.
The borrowers that were unfairly dealt with, as a result of the banking practices of the banks of Cyprus, should take legal action to defend of their rights. Although every mortgage agreement should be judged on its own merits, a successful case may be instrumental towards the general defence and justification of other borrowers.
Savvas Savvides is a partner at Michael Kyprianou law firm, which as offices in Nicosia, Limassol and Paphos,
[email protected]
