Standard conditions for Mortgage Eligibility Criteria in Portugal
At the beginning of 2018 new guidelines were introduced by the Banco de Portugal giving the banks a standard set of conditions to be applied to mortgage applications for both domestic and international mortgage applicants. At the time of writing, the banks are inconsistently applying these conditions which can make the outcome of any particular mortgage application uncertain. There are two main criteria that the banks will be considering when making the decision whether or not to lend; the loan to value ratio (LTV) and the ratio of the debt to your income. It would appear that the banks are placing particular emphasis on the debt to income ratio so this is worth bearing in mind when thinking about your mortgage application. The two main eligibility criteria are discussed in more detail below.
Loan to Value Ratios (or LTV)
As an international buyer applying for a mortgage for a property in Portugal, then you are not very likely to find many banks willing to lend above an 80% Loan To Value or LTV. For Portuguese banks, it means 80% of the lower amount of the agreed purchase price or the value of the property determined by an independent surveyor.
Loan to Income Ratio (taxa esforço)
Particularly relevant to Portuguese lenders is the level of your debt to your total eligible, gross income considered together with the security and predictability of that income.
Since the 1st of Jul 2018, the debt cannot exceed 30% of your total eligible net income However, there can be a little flexibility so that the debt could be increased to a higher percentage of your income or reduced to a lower percentage depending on your personal financial situation.
Please note that for some banks, but not all, total eligible income may include income from rental properties. However, if your primary source of income is from property rental earnings, then some banks in Portugal will only accept a percentage of the revenue to count towards your total gross income. This is designed to protect you from the risks of non-payment from tenants, the period between different tenancies or the costs of maintenance works that will be required from time to time.
Therefore, if the lender does not think you have a reliable business or if your employment is not permanent, the percentage level of the loan or taxa de esforço will be diminished.
Essentially, if you have a high, secure and stable income, your application is likely to be considered favourably by a lender and a better deal offered i.e. a higher loan to income proportion. Conversely, if you are self-employed or have irregular employment, your risk to the bank would be considerably higher and therefore you would be likely to be offered a much lower loan to income proportion.
In this area of loan to income ratios, it is possible to manipulate the terms on offer to create the best deal for your individual financial situation. For example, at the moment interest rates are extremely low because the twelve month Euribor rate is actually negative, and this means that you would be able to borrow a proportionally higher amount because the low interest rate would mean lower monthly payments which would result in a lower loan to income ratio. However, longer term the Euribor rate will inevitably rise which would considerably increase the ratio of the loan to income and of course, your monthly payments.
Another option which would carry less risk would be to consider extending the term of the mortgage. As the loan would be repaid over a longer period, the monthly payments would be reduced and therefore the loan to income ratio would be lower. However, please be aware that you would potentially be repaying much more money in the longer term.
Key risk factors for lenders
In examining your application for a mortgage, the bank will want to assess, and of course, minimise their risk exposure. Any mortgage application will be considered in light of the new standard conditions but also on your own personal risk factors. So the final decision will always vary from person to person.
If you are an employee key risk factors for a bank in Portugal will be low pay, precarious employment or short-term employment.
If you run your own business or you are self-employed and you do not have a regular fixed income, then the lender will consider the length of time your business has been running together with your earnings over a few years. If you own a new business that has only recently started trading or have only recently become self-employed, then the bank will be much more cautious and will want to observe your financial performance over several months before approving a mortgage.
Whether you are an employee or self-employed, a high level of loan to value and a high level of existing and future personal debt are also risk factors for the banks.
In the case of any property purchase in Portugal, in addition to the purchase price of the property, you would be expected to finance all the transaction costs, which generally run to around 10% of the value of the property in Portugal.