MORTGAGES
GETTING A MORTGAGE IN PORTUGAL
Rules for taking out home loans in Portugal may differ slightly from the process you are used to in your home country. By reading this guide, you will better understand mortgage rates and other details related to taking out a loan in Portugal. The relatively low cost of property and reasonable interest rates compared to many European countries have made buying property in Portugal appealing.
LOAN VS CASH
The first step when considering applying for a mortgage loan is to decide if it makes sense to ask for a loan. Whether settling for a loan or buying a property outright will always be an ongoing debate that is extensively discussed.
Purchasing a property "in cash" is quite an achievement and a bit of a reach for many. Even if you can afford to purchase a property outright, it could be wise to obtain a mortgage instead.
Real estate has historically been considered the lowest-risk investment due to constant real estate price increases. The expression among investors, "as safe as a home," speaks for itself.
Assuming a cash investor and a leveraged investor both have 100,000€, the cash investor purchases a property for 100,000€. If the property appreciates by 5% per year, and the value of the property increases to 105,000€, the cash investor makes 5,000.00€. The leveraged investor purchases a property for 500,000€ and puts down a deposit of 100,000€. Assuming the same 5% rate of appreciation, and the value of the property increases to 525,000€, the cash investor makes 25,000.00€, 5 times that of the cash investor. A smart investor can make a substantial return when this formula and method are used for two or three homes. Imagine 5% growth every year for the next 10 years.
Most cash buyers invest most of their funds in buying a home. On the flip side, a leveraged investor can spread the investment over different properties, allowing them to increase their percentage return.
ARE FOREIGNERS ABLE TO APPLY FOR A MORTGAGE IN PORTUGAL?
You will be very glad to know that there are no legal restrictions on non-residents purchasing homes or obtaining home loans in Portugal. If you have been considering investing in real estate or moving here, it's possible; as long as you meet all criteria, nothing stops you. Although non-residents looking to finance property may have to fork out 30%-40% of the purchase price/evaluated price as an up-front deposit.
WHAT LOAN-TO-VALUE RATIO (LTV) CAN I EXPECT IN PORTUGAL?
Loan-to-value ratio (LTV) is a necessary calculation for mortgage applications. It refers to the amount you're borrowing in proportion to the amount you are putting down as a deposit on a property. For example, if you purchase a home of 100K and put down a deposit of 10K, you will finance 90K, meaning an LTV value of 90%. Banks often see loans with an LTV ratio of more than 80% of the property value as carrying a higher risk. As a non-resident, you may get slightly less attractive terms as the risks may be higher for the bank; therefore, for fiscal residents buying their permanent residence, banks will loan them up to 90% of the property's purchase or appraised value, whichever is lower. As a non-resident, you may expect up to 70% of the home's appraised value or purchase price, whichever is lower.
MORTGAGE TERMS IN PORTUGAL?
More people are finding it challenging to afford a home because of rising property prices in the last couple of years, which forces them to settle for a longer-term mortgage that allows for smaller monthly payments but typically ends up being more costly as the lender ends up paying more interest. Your age and years of income are taken into consideration by lenders when determining the loan term. In other words, the duration you qualify for would be nearer to your retirement age. The typical Portuguese mortgage length is up to 25 years, although some lenders may extend it to 30 years.
WHAT IS THE MAXIMUM AGE AT WHICH I CAN OBTAIN A LOAN?
Generally, obtaining a mortgage will be more challenging if you are over 70. Nevertheless, some lenders might increase this to 80 years of age. Final terms and conditions are based on the lender's unique risk profile and financial strength.
MORTGAGE TYPES IN PORTUGAL
Fixed-rate mortgage:
The fixed rate is where the borrower would pay the same amount each month during the mortgage period, regardless of market fluctuations. This option would financially protect you against market fluctuations.
Variable-rate mortgage:
The variable rate is where the borrower would pay a different value each month during the mortgage period depending on the index (Euribor), which is a reference point that changes depending on the market and serves as a benchmark for interest rates. The interest rate is usually revised every couple of months. You may be penalized if you make an early repayment.
Mixed-rate mortgages:
Mix-rate mortgages typically have a fixed interest rate for 5, 10, or 15 years, followed by a variable interest rate indexed again to the Eurbor. Many people opt for variable interest rates because they are lower than fixed interest rates.
MORTGAGE LOAN INSPECTIONS
After agreeing on the purchase price, the bank will schedule a property valuation. It's crucial to remember that the bank's assessment is usually lower and does not always correspond to the market value. Therefore, banks will often use the lowest of the two to calculate the LTV (loan to value) if the purchase price differs from the bank's assessment.
WHEN SHOULD I START THE MORTGAGE APPLICATION PROCESS IN PORTUGAL?
Purchasing your first home could be the most crucial financial decision you'll ever make, whether for you to live in or simply for investment. Before moving, you need to ensure that your finances are in order. Once you've decided to buy a new home, submit a mortgage application immediately. Not only does the process take weeks, but it will also give you a rough indication of the conditions and amount you can get pre-approved for.
When you've found your dream home and there are hundreds of other interested buyers to compete with, having this jump start may make a difference during negotiations. Time becomes money!
Although the entire process may appear complex, Kuabit can connect you with a trusted mortgage broker. This can assist you in obtaining financing and negotiating the most favorable deal for you with several banks.
REQUIRED DOCUMENTS FOR STARTING THE PROCESS:
Getting your documentation organized can be a daunting task. While each bank may have different documentation requirements, we've compiled a list of the essentials to have ready as you start the application.
· Birth certificate or valid ID or passport;
· Marriage certificate;
· Proof of address (e.g., gas, telephone, water, etc.);
· NIF number / Portuguese tax number;
· Last six months' salary slips, or other income received regularly;
· Letter from employer stating your designation, employment type, and compensation;
· Bank statements (last six months) for cheque and savings accounts;
· Tax return for the previous year;
· P60 / End of year certificate;
· Credit report with scoring;
· Liability Statement (e.g., Mortgages, Personal Loans, or any other type of loan).
CAN I REFINANCE MY LOAN?
You may take advantage of reduced interest rates by refinancing your current Portuguese loan. In addition, you can refinance the loan using the same lender or a different one. By doing so, you may reduce your monthly mortgage repayments, adjust the terms, shift from fixed to variable, increase, or decrease your mortgage term, or borrow extra money by using the equity in your property.
IS LIFE INSURANCE MANDATORY WHEN TAKING OUT A LOAN IN PORTUGAL?
When requesting a mortgage in Portugal, life insurance is legally necessary. However, taking out life insurance from the same bank offering you the loan is optional. Insurance premiums can easily exceed monthly mortgage repayments; therefore, shopping around and seeing where you can obtain the most affordable deal is essential! You may save money on the spread offered if you purchase life insurance via your bank. One should always consider whether it is worth taking out insurance with another company, i.e., whether the lowered spread compensates you for having cheaper life insurance with another company.
NEED MORE MORTGAGE ADVICE?
The mortgage application process can be complicated, especially if you are a first-time home buyer. Kuabit is an exclusive buyer's agency; we work with reputable and experienced mortgage brokers to assist our clients in obtaining the right loan with the most favorable conditions and rates. Therefore, you can be confident that you are getting the ideal loan for your circumstances, making choosing the right loan quicker and saving you a significant amount of time!
Now that you know how it works to obtain a loan in Portugal, are you ready to start the process? Feel free to reach out to us via email or fill out the form below, and one of our friendly buyers' agents will contact you.
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GET IN CONTACT
Kuabit is an exclusive buyer´s agency and has helped many happy clients buy real estate in the Algarve, Braga, Cascais, Lisbon, and Porto. We´re happy to clarify any doubts that you may have. Reach out to us, and we’ll respond asap.
+351 936 070 311 (Portuguese mobile network number)