Buying Property in Portugal : Mortgages

Alcino,  Wednesday, 8 January 2014

 

This article is part of a series of 8 articles about buying property in Portugal. The other articles in the series cover the following topics:


Not everyone looking to buy property in Portugal has the financial capacity to make an outright purchase. A large number of individuals will require some form of financing, usually by means of a mortgage loan. Almost all major Portuguese banks have tailor-made residential mortgage products aimed at foreigners that aim to buy, construct or renovate a permanent or holiday home in Portugal.

Conditions vary from bank to bank, but in the end you will find that all parameters fall within a set of limits. On the internet you will find much information relating to offers for financing of up to 100% of a property purchase. However, you will soon discover that this data is mostly pre- recession and today 70%-80% is more realistic and closer to what you are likely to get. Mortgage terms (the number of years in which the mortgage must be paid in full) currently max out at 30-40 years, with an age limit of 70-80 for the oldest applicant at the end of the term. There are also limits for the minimum amounts that can be borrowed, which usually round-off anywhere between €30,000 and €50,000.

There are two basic types or Capital + Interest mortgages:

VARIABLE INTEREST RATE:

This is made up of a base interest, which follows the banks borrowing rate (usually the 3 or 6 month Euribor rate) + the bank’s spread, which is fixed and agreed upon at the beginning of the contract. The monthly instalments are therefore influenced by the periodic rise and fall of the market interest rates. In some cases, banks may stabilise monthly instalments by adjusting the loan term, whenever there is margin to do so.

FIXED INTEREST RATE:

The rates agreed upon here are usually much higher than what would currently be available for a Variable Rate. However, fixed rate loans provide a certain degree of stability to the mortgagor, as monthly repayments will remain consistent for the duration of the term. This could prove to be detrimental if market interest rates were to drop, but may play in your favour if the interests rate rise above your fixed deal.

Valuation is king in Portugal and banks will always base their conditions for approval and the percentage they are willing to finance on the amount that their professional appraisers attribute to a property. This is known as Loan to Value (or LTV for short). This means that, although you may agree on a fair market price with your seller, the percentage that the bank is prepared to lend you may not meet your expectations or requirements if their valuation returns a lower figure. On the other hand, if the valuation comes back with a higher number, you are in luck.

Portuguese mortgages are always in Euros and so, therefore, it is advisable for anyone not earning in this currency to understand the implications of exchange rate fluctuations and to do everything possible to minimise the risks involved.

Banks in Portugal will only formally process a mortgage application once an actual property has been chosen. Before this point, however, you can get a letter of pre-approval from most banks (different to a mere quote) that takes your personal financial situation into account and pre-approves a loan for a certain amount. As long the information you have provided to the bank accurately reflects your situation, you can proceed in your search for a property with some degree of confidence that you will secure a loan for your purchase. The pre-approved amount will be based on your indication of a price range and final loan approval remains subject to you providing the requested proof of your financial situation, indicating the property you wish to purchase and the bank’s appraisers confirming a satisfactory valuation.

If you are unfamiliar with Portuguese banks or encounter a language barrier upon dealing with commercial assistants, you may want to appoint a professional mortgage brokerage service to handle the process for you. Make sure to choose a broker that has your best interests at heart, though, as some only have agreements with one or two banks and will attempt to channel your business their way. Look for services that are willing to seek out offers from a list of banks and retrieve a variety of proposals. Brokers obviously make their income by earning commissions from the deals they see through with banks and their services to you are often free. Some, however, may charge a commitment fee to begin the application process, while others a success fee at the end.

Once you have secured a mortgage agreement there will be certain costs to consider:

ESSENTIAL COSTS

  • Property Valuation Fee: €100 - €600
  • Mortgage Arrangement Fee: 0€ – €1000
  • Mortgage Administration Fee: 0€ - €300
  • Periodic (monthly) Admin Fees: €0 - €10
  • Multi-Risk Residential Insurance: Depends on property size, location, etc.
  • Stamp Duty: 0.6% of Loan Amount
Non-Essential Costs (NOTE: THESE MAY BE COMPULSORY AT CERTAIN BANKS)

  • Life Insurance: €5 - €20/month
In the event that you decide to pay off the mortgage early, you may be liable to pay a penalty. Early payment penalties are limited by law, though, and may not exceed 0.5% of the sum you repay on Variable Interest Rate loans, and 2% for Fixed Interest Rate loans.


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