Interest rates sit at the heart of personal and business banking in Cyprus, influencing everything from how much you earn on your savings to how much you repay on a loan. Whether you’re opening your first bank account or trying to understand why your loan payments change over time, knowing how interest rates work, and the factors that drive them in the Cyprus market, can empower you to make smarter financial choices.
In this guide, we’ll explain what interest rates are, how they function, and the main types you’ll encounter when borrowing or saving.
What is the interest rate?
The interest rate is the interest due, expressed as a percentage of the principal amount borrowed or deposited. The difference with the interest is that the interest is the amount and the interest rate is the percentage.
What are the main components of an interest rate?
Interest rates consist of several key elements that determine how much you earn or pay over time.
The most essential components include:
- Principal: The initial amount borrowed or deposited.
- Rate Percentage: The proportion applied to the principal.
- Time Period: The duration for which the rate is charged or paid.
Additional factors may influence the final rate, such as how often interest is compounded, and any extra fees or margins applied by Cyprus banks to reflect lending risk.
How do interest rates work?
Interest rates determine how money grows on your deposits or how much it costs to borrow over time. When you borrow from a bank, the interest rate sets the additional amount you must repay beyond the principal. For savers, it defines how much income you earn from deposits.
Banks in Cyprus adjust interest rates based on several factors, such as inflation, European Central Bank policies, and market demand for credit. Higher rates generally make borrowing more expensive but reward savers with greater returns, while lower rates encourage spending and investment but reduce savings income.
What is the Annual Percentage Rate (APR)?
The Annual Percentage Rate (APR) is the yearly interest charged for a loan or earned by a deposit and includes both interest and fees or charges. Consumers can use the APR to compare products between different financial institutions as it is calculated in a consistent way and protects consumers from misleading advertisement. Namely a loan product advertised with a lower interest rate may have a higher APR than a loan product with a higher interest rate due to higher overall fees.
The table below demonstrates this by comparing two indicative loans with different interest rates and fees/charges:
| Loan A | Loan B | |
| Amount | €100,000 | €100,000 |
| Tenor | 10 years | 10 years |
| Interest Rate | 4% | 4.15% |
| Additional Fees/Charges | €1,250 | €0 |
| APR | 4.28% | 4.15% |
This table is for informational purposes only.
What factors influence interest rate changes in Cyprus?
Several key elements shape how interest rates move in Cyprus, reflecting both local and global financial dynamics:
- Monetary Policy: The European Central Bank (ECB) plays a central role by setting base rates for the entire Eurozone. Decisions on rate hikes or cuts, as well as several policies, directly influence borrowing costs in Cyprus.
- Inflation Levels: Rising inflation typically prompts higher interest rates as policymakers aim to slow price growth, while lower inflation may support rate reductions to encourage spending.
- Economic Growth: Strong economic performance can drive up lending activity, prompting banks to adjust rates upward. Conversely, slower growth often leads to softer lending conditions.
- Bank Liquidity and Funding Costs: Local banks regularly revise their base rates depending on deposit inflows, funding costs, and their access to liquidity. A bank’s ability to raise money efficiently affects what it charges borrowers.
- Market Competition: The rates offered by competing banks also influence pricing.
What are the types of interest rates in Cyprus?
Banks in Cyprus apply different types of interest rates depending on the product or financial service offered.
1. Savings Account
Savings Accounts pay interest on deposited funds, usually at a lower but flexible rate. These rates are often variable, meaning they can change. Because savings accounts allow easy access to funds, they typically offer lower returns compared to term deposits.
2. Fixed Term Deposit Account
Fixed Term Deposit Accounts provide higher, predetermined interest rates for a set period, such as 3, 6, or 12 months. In exchange for locking in their money, savers benefit from stable returns protected from rate fluctuations during that term.
3. Loans
Loan interest rates determine how much borrowers pay on financing products such as personal loans, car loans or housing loans. These rates may be variable, moving in line with the ECB rate or the bank’s base rate, or fixed, remaining unchanged for a specified period.
4. Bank Base Rates
Each Cypriot bank sets its own base rate, which serves as a benchmark for determining lending rates across different products. These base rates reflect the cost of funds, liquidity, and market risk, and they often move in tandem with Euribor and ECB rate adjustments.
For more information see Ancoria Bank’s Base Rates and Rates Definitions: Effective as of 24/02/2020 / Effective before 24/02/2020 and Personal Banking Interest Rates.
What is the difference between variable and fixed interest rates in Cyprus?
A fixed interest rate deposit/loan is when the interest rate remains unchanged during the life of the deposit or the loan. Variable interest rate is more commonly applicable to loans and is when the interest rate fluctuates during the life of the loan based on an underlying index or benchmark that periodically changes. With a fixed interest rate loan the monthly payments are fixed whereas with a variable interest rate loan the monthly payments vary. This means that it can increase or decrease depending on how the underlying index or benchmark is affected by market and several economic or other factors.
| Feature | Variable Rate | Fixed Rate |
| Payment Stability | Can change during loan term | Stays the same for fixed term |
| Pros | Lower initial cost, may fall | Predictability, easier budgeting |
| Cons | Payments may rise | Higher initial rates, lacks flexibility |
Choosing between variable and fixed rates depends on your risk tolerance and financial situation: variable rates may offer short-term savings, but fixed rates provide peace of mind over the fixed period.
How do interest rates affect borrowing and saving?
Interest rates have a powerful impact on both borrowing and saving in Cyprus:
- For borrowers: When interest rates climb, taking out loans becomes more expensive, monthly repayments rise, which can put extra pressure on household budgets and slow down borrowing for homes or businesses.
- For savers: Higher interest rates reward savers with better returns on savings accounts and fixed term deposit accounts, making traditional saving more attractive. Conversely, when rates drop on deposits the appeal of savings reduces and prompts someone to seek alternative investments.
This dynamic means that rising rates tend to encourage saving and discourage excessive borrowing, while lower rates boost borrowing but offer savers smaller returns on their money.
How do savings accounts benefit from interest rate changes?
Savings accounts benefit from interest rate changes by adjusting the returns you earn on deposited funds.
When interest rates rise, banks typically increase the percentage paid on savings accounts. This means savers see higher yields on their balances, especially for larger deposits or longer-term savings products like fixed term deposit accounts. On the other hand, when interest rates fall, the returns from savings accounts decrease.
Overall, interest rate changes allow savers to benefit from higher earnings during periods of rising rates, but returns will diminish when rates are cut, making flexibility and account choice important for maximizing income.
