Types of Mortgages
Fixed, Variable, Hybrid Mortgages: your options in Portugal
When you start looking for a mortgage in Portugal, you will soon realise that the banks offer three types of mortgages: fixed, hybrid and tracker. All mortgages fundamentally work in the same way: you borrow money to buy a property and repay the capital with interest over a fixed period of time until the loan is completely repaid. It is important to choose the best mortgage product to suit your circumstances as it will determine the overall cost of the mortgage and therefore the overall cost of your property purchase. However, you should realise that this does not necessarily mean going for the cheapest rates because other circumstances can affect your decision. There are several factors to take into account before deciding which type of mortgage to choose, so set out below, are a few of the main features of each mortgage type.
Fixed and hybrid rate mortgages
With a fixed rate mortgage, the interest rate and the monthly payments remain the same for the whole period of the mortgage but typically the fixed interest rates will be slightly higher than the lender’s standard variable rate. With a hybrid rate mortgage, the initial interest rate can be fixed for 4, 5, 10 or even 15 years depending on the bank and your personal circumstances. At the end of the fixed rate period, your mortgage will switch to the bank’s standard variable rate which, at the time of the change, could be either higher or lower than the fixed rate. Your monthly payments will then follow the variable rate and therefore will increase when the interest rate goes up and vice versa.
Positives about a fixed rate and hybrid mortgage:
It is easy for budgeting as the monthly payments do not change for the whole period or the fixed rate period.
You can think of a fixed rate mortgage as little like insurance against fluctuating interest rates, especially if you think that the interest rates will go up during the fixed rate period.
Negatives about a fixed rate mortgage:
Your monthly payments will stay the same even if the variable interest rate falls below the fixed rate during the fixed rate period.
In Portugal, the bank will apply higher early redemption charges (Custos do Reembolso Antecipado) if you want to make lump sum repayments or repay your mortgage in full before the fixed rate period ends. The early redemption penalty is by law 2% of the amount redeemed plus 4% stamp duty during the fixed rate period.
If you plan to keep the property for many years, a fixed rate or hybrid mortgage can be the best option.
In this case, the interest rate applied to the mortgage advance is variable and will often be expressed as an agreed percentage above the ECB’s base rate or Euribor. As the ECB’s base rate or Euribor rises and falls, your interest rate will follow these fluctuations and your monthly payments will be impacted accordingly.
Positives about tracker mortgages:
Your monthly payments will decrease if the ECB’s base rate or Euribor goes down.
In this case, the early redemption penalty (Custos do Reembolso Antecipado) is lower and in Portugal by law represents 0,5% of the amount redeemed plus 4% stamp duty.
Negatives about variable mortgages:
You’ll pay more each month if the ECB’ s base rate or Euribor goes up and theoretically the sky is the limit. At the moment, interest rates are extremely low and sometimes even negative but both rates are bound to go up at some point in the future and this should be borne in mind when considering longer-term mortgages.
Best used when the owner only wants to stay in the home for a few years or pay the mortgage quickly.