I have recently been dealing with a case where a banking institution in Cyprus has requested the client to repay his housing loan earlier or transfer his loan to another bank.
The reason given by the bank for this drastic request was that the bank had decided on a new policy whereby all housing loans of British citizens would be closed by the end of December 2022.
It must be noted that, although this was a performing loan in which a fixed period of repayment had been agreed and a fixed monthly instalment, the bank made the unilateral decision to change its policy, thereby affecting the terms of the agreement signed.
Therefore, the client was left to face this problematic situation through no fault of his own.
Legally speaking, we are talking here about a clear case of breach of contract.
From the moment that one enters into a written agreement with the bank for a fixed period of repayment of the loan, any changes to the terms of this agreement immediately bring the other party in breach of terms.
In this case, the bank asked the client to repay his loan earlier than agreed, thus putting the lender in a very difficult position and out of his scheduled programme of repayments.
Unfortunately, however, on several occasions, the terms of a loan agreement are one-sided in favour of the bank, and this is where unfair terms of agreement creep in.
When the client signed the agreement, he would not have realized the serious implications of these unfair terms.
As a result, the bank is taking full advantage of the situation where the lender is completely at the mercy of the bank and its policies.
Clearly, this is a legal issue that can be challenged through the courts as to whether the bank has the right to make such a unilateral decision, considering the law regarding unfair terms.
The European Court of Justice has ruled in several such cases of unfair terms.
I stipulate with full confidence that the European Court has more often than not ruled in favour of the lender rather than the banking institution.
The question that always arises, as in this case, is whether the lender is willing to enter into a lengthy litigation procedure to secure their rights or whether they will choose to transfer the loan to another banking institution.
The lender has to realize their rights and not only obligations towards the bank.
From the moment rights are infringed, as in this case, where the bank’ forces’ the lender to transfer the loan to another bank or to repay the loan earlier than agreed in a lump sum, the client has the right to defend their case and seek legal advice to reach an amicable outcome.
The lender has every right to negotiate a discount on the balance of the loan if they decide to repay it in a lump sum, regardless of whether they will transfer the loan to another bank or not.
The client has been put into the difficult situation of having to go through the whole process again of transferring a loan from one banking institution to another.
Hence, in this case, the lender’s motive is primarily to decrease the burden of the loan repayment before transferring the loan to another bank.
Another advantage the lender should consider if he gets into this problematic situation is negotiating a lower interest rate with the new banking institution.
However, the new bank will undertake a credit check on the lender.
There is a possibility the credit scores at that specific time, where the pandemic has drastically affected the economy, may result in a situation where it has dropped.
As a result, the new bank may not grant the loan.
Another fact to consider is the need to negotiate with the existing bank what bank charges and other fees they will be charged not only by the existing bank but also by the new one.
So, the lender needs to be careful they will not be charged these fees unnecessarily from both banks.
In Cyprus, in recent years, what was previously considered a simple process of opening a bank account and getting a housing loan has become complicated.
Unfortunately, in many cases, if a client did not take the right legal advice from the start and before entering into any agreement with the bank, they could face the situation where the bank has the full benefit over the client, thereby causing them a great deal of trouble and cost to defend their rights.
The client is usually all too keen to obtain the loan and tends to sign the documents given by the bank without taking the time to read the small print, and as a consequence, it often happens the bank includes unfair or irregular terms in the agreement.
For instance, declaring the client has taken legal advice before signing the agreement, when in actual fact the lawyer providing the legal advice is not independent and has not explained the conditions of the loan clearly to the lender.
In this way, the bank covers itself in the event of a legal dispute which may arise during the lifespan of the loan agreement.
Thus, when making such serious decisions as applying for a housing loan, it is always advisable to seek independent legal advice and ensure that, whatever documents one signs with the bank, there is a balance of rights and duties between the bank and the lender.
Savvas Savvides is Partner and Director of the Paphos Office at Michael Kyprianou & Co LLC