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Mortgages in Portugal

If you need to secure a mortgage in order finance a property in Portugal, it would be wise to start arranging your Portuguese mortgage almost before you do anything else.

Careful due diligence will allow you to gain a good idea of how much you can afford to pay to purchase your Portuguese property and can work the monthly payments.

Failure to sort out the financial side of your Portuguese property purchase until the end may leave you in a bit of a muddle and with a less attractive mortgage deal at a higher borrowing rate.

Lending terms
Despite much economic uncertainty in recent years, not to mention an unstable housing market, all the major Portuguese lenders continue to provide mortgages to suitable individuals, including overseas nationals, purchasing property in Portugal.

The banks typically offer loan terms of up to 50 years for residents and 30 years for non-residents. The maximum age upon maturity of the loan is 70 or 80, depending on the lender.

Deposit
For a Portuguese mortgage, you will generally need a minimum deposit of 20% of the property’s purchase price, because the borrowing varies from 60% to 80% of the purchase price or valuation price, depending on the lender, with loans available on a variable rate or fixed rate basis.

Fixed- or variable-rate?
Most Portuguese lenders offer different types of mortgage repayment options on either a fixed or a variable interest rate.

VARIABLE-RATE MORTGAGE

The interest rates of a Portuguese variable rate mortgage is linked to either the three- or six-month Eurropean Central Bank (Euribor), rate and increased by the margin (profit) that the bank applies. The Euribor rate is set by a panel of European banks on a daily basis and is generally an indicator as to what rate European banks will lend to each other. The early redemption penalty for a variable-rate acquisition mortgage is 0.50% as per the regulation of the Bank of Portugal.

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FIXED-RATE MORTGAGE

A fixed-rate mortgage allows you to budget for future mortgage payments as the monthly cost will remain constant throughout the fixed rate period and you are protected from future increases of the European base rate. Fixed-rate mortgages are available from some lenders and the fixed-rate period can range from one to 30 years. After the fixed-rate period expires, the mortgage will automatically convert into a variable rate mortgage (unless the rate is fixed for the entire loan period). The early redemption penalty during the fixed-rate period is 2% as per the regulation of the Bank of Portugal.

Repayment or interest-only?
With banks in Portugal now adopting greater caution following the recent Portugal property crash, most lenders now only offer home loans on a repayment basis – including both interest and payment towards the capital loan amount – with borrowing rates starting from around 6%. However, there are still some interest-only deals available.

Lending criteria
The banks will take the following two criteria into consideration when analysing your mortgage file for approval: financial position and property valuation.

FINANCIAL POSITION
The bank will require proof of your current income earnings such as salary income, dividend payments, investment income, pension income and rental income. The banks consider the net income of each applicant that is confirmed by pay/pension slips, tax return and bank statements. The lender will also require information about any existing debts and employment history. All this information will help the lender to decide if you will be financially comfortable meeting the costs of your monthly Portuguese mortgage.

PROPERTY VALUATION
The bank will commission an independent engineer to value your property. The banks are currently lending between 60-80% of the valuation price.