To mortgage or not to mortgage
How will you finance yours?
It is important to know how you will finance your property purchase - will you re-mortgage your home to release equity, use savings and/or pension funds or, try to get a mortgage over here? If you are considering taking out a mortgage to fund your purchase we recommend that you start to look into this before coming over to view properties.Read more
The mortgage process in Portugal can take 6-8 weeks. If you find your dream home while you are with us you need to be in a position to secure it with the €6,000 reservation fee followed up 14 days later with the deposit for the Promissory Contract. We have seen clients loose out on the property of their dreams as their finances weren’t in place in time and the vendor was approached by another buyer who had all their ducks in a row and the property went to them. Failure to sort out the financial side of your Portuguese property purchase until the end may also leave you in a bit of a muddle and with a less attractive mortgage deal at a higher borrowing rate.
Getting a mortgage in a foreign country can feel a little daunting. It’s difficult to know where to start and where to go for the best rates and advice. The mortgage market here is quite traditional in the sense that having the right contacts is crucial if you want to get the best deals. Banks do not always offer the same conditions to clients, even if they have similar profiles. From our years of selling property in Portugal we have worked with mortgage brokers as well as directly with a number of banks. From our experience we have found that dealing directly with the banks is far easier for our clients and our colleagues are able to get the best rates and terms available.
For non-residents who pay their taxes outside Portugal, generally speaking the maximum mortgage amount is 70% of the purchase price (or valuation if lower), but some banks have a maximum amount of 60%. For fiscal residents who pay Portuguese taxes, the maximum mortgage is 80%.
If you are over the age of 60 and in receipt of a pension, you can still have the mortgage in your own name. It is also possible to appoint a guarantor such as a family member to secure the borrowing, which can have potential inheritance tax benefits if they are also a part-owner of the property.
For those wishing to build their own homes, banks do offer construction mortgages. These are complicated to explain and it is certainly best to speak to a professional, but broadly speaking you can potentially borrow 50-60% of the land and construction costs combined.
If you are buying a property for commercial use, such as a restaurant or a shop for example, the maximum mortgage is 50% of the price (or valuation if lower). If you intend to run a business the lenders will ask for business plans and, where applicable, accounts for any previous business operating at the premises, as well as what previous experience you have had running a similar business.
Fixed or variable rate?
Most Portuguese banks offer different types of mortgage repayment options on either a fixed or a variable interest rate.Read more
The interest rates of a Portuguese variable rate mortgage are linked to either the three or six month European 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.
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.
The banks will take your individual financial position and property valuation into consideration when analysing your mortgage file for approval.Read more
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.
They will use what is known as a debt-to-income calculation as the basis for deciding whether applicants will qualify for a mortgage. In basic terms, this means that your monthly debt commitments, including the new mortgage, must not exceed a given percentage of your net monthly income. The typical percentage is between 30-35%.
There are many other variables to take into account, but this gives a very basic idea of how the banks assess the applicants for the mortgage.
The bank will commission an independent engineer to value your property.
Portuguese banks will require a range of supporting documentation in order to process a mortgage application. These documents can include:
- Copy of passport
- Copy of Portuguese tax number
- Proof of address (copy of recent utility bill)
- Credit report
- Recent bank statements
- Recent pay slips
- Latest personal tax return
- Copy of tenancy agreement(s)
Most mortgages can be arranged with terms of 25 years (for non-residents) and 30 years (for residents), usually up to a maximum age of 75. For non-residents, some banks have a maximum 20 year term.