Since interest rates are low, financing the purchase of a property through a national bank loan could be an interesting option, especially because since 2010, Portuguese banks have not been lending as much as they are now. During the first four months of this year, almost 3 billion euros were lent for the acquisition of property.
According to Statistics Portugal (INE) the implicit interest rate on mortgages was 1.032% in June, a slight increase of 0.1 percentage points when compared to the previous month (1.031%). Spreads currently vary between 1,15% and 5,3%, depending on the bank and applicant’s risk rate, according to a survey carried out by Economia e Finanças.
Following the trend of the Portuguese property market, bank valuations are continuously rising since several months. In May, the average amount was 1,176€ per sq m, 5€ more than in April and 65€ more than in May of the previous year. The average amount per sq m of an apartment was 1,232€ and 1,074€ of a villa. The highest amounts were registered in the Algarve and Lisbon and the lowest in Alentejo and Centre.
Portugal’s new mortgage restrictions
In order to avoid excessive loans which may compromise the bank’s financial situation in the future and in order to guarantee that families remain in a position of paying their debts, the Bank of Portugal has implemented three new rules which came into effect on July 1st:
1. Loan-to-Value (LTV) limited to 90%
For primary residences, the ratio between loan and value of the property must not exceed 90%. For second homes, ratio drops to 80%. For repossessed properties the ratio remains unaltered at 100%.
2. Debt Service-to-Income (DSTI) limited to 50%
In general terms, loans must not be higher than 50% of the consumer’s monthly net income, although two exceptions confirm the rule: this limitation may be exceeded by
a) 5% of the total amount of money lent by each bank in a year and
b) 20% of the total amount of money lent in a year may have a DSTI of 60%.
3. Shorter Terms
The aim is to gradually reduce the average term from 33 to 30 years until the end of 2022. In order to achieve this, the current limit of 50 years has been reduced to 40 on new mortgages for residents. For non-residents, the maximum mortgage term continues to be 30 years. The maximum age upon maturity of the mortgage is generally 80 for residents and 75 for non-residents.
When applying for a mortgage, the following documents need to be presented to the bank.
• Portuguese Fiscal Number (Número de Identificação Fiscal – NIF);
• Copy of passport(s);
• Last three months personal bank statements;
• Proof of address (e.g.: utility bill, but not mobile phone);
• Credit reference report;
• Latest mortgage statement;
• Bank reference letter.
• Application Bank Forms (attached)
• Copy of last year’s income tax declaration
• Employer’s reference confirming current employment length of service and gross annual salary
• Payslips for the last 3 months;
• Property Documents (caderneta predial, certidão de registo predial and floor plans);
• Full Credit Report (with scoring).
2. If employed:
• Last year tax returns (P60 in the UK);
• Last three months pay slips;
• Reference letter from employer (simple letter stating how long you have been working with the company and your gross annual salary, etc.).
3. If self-employed:
• Last year’s tax return;
• Last three months business Bank statements;
• 3 Years of Company Profit & Loss and Balance Sheet.
The following insurances should be considered when obtaining a mortgage:
1. Building Insurance
Building insurance is a mandatory requirement when taking out a Portuguese mortgage. The minimum cover required is generally against fire and floods.
2. Life Insurance
Some banks require life insurance cover for either the main applicant or both mortgage applicants.
For further information on this matter or for assistance obtaining a mortgage in Portugal, please feel free to contact me or anyone in my sales team at Kaiser Properties.