New mortgage lending rules come into force in Portugal – Portugal Resident
New lending rules came into force across Portugal today (August 1), introducing stricter affordability tests for anyone applying for a mortgage or other forms of consumer credit.
The changes, set out in a new “macroprudential recommendation” by the Bank of Portugal, are designed to strengthen the financial system and prevent households from taking on excessive debt at a time of rising property prices and increasing demand for home loans.
The recommendations replace rules first introduced in 2018 and apply to all banks and financial institutions authorised to lend in Portugal. They affect all new credit applications whose affordability assessment is carried out from August 1 onwards.
Stricter affordability test
The most significant change is a reduction in the maximum debt service-to-income ratio (DSTI) – known in Portugal as the taxa de esforço.
This measures the proportion of a household’s monthly net income used to repay all outstanding loans, including mortgages, car finance, personal loans and credit card debt.
Previously, banks could generally approve loans where repayments amounted to up to 50% of a borrower’s income. Under the new rules, that ceiling falls to 45%.
The calculation is based on a stress scenario in which interest rates are assumed to rise by 1.5 percentage points, ensuring borrowers would still be able to meet repayments if rates increased.
The Bank of Portugal said the lower threshold is intended to “reinforce prudence” in assessing borrowers’ financial capacity and to limit excessive household indebtedness.
Limited flexibility
Banks will still be able to approve loans that exceed the 45% threshold, but only in 10% of new lending each semester, down from the previous 15%.
The central bank says this flexibility allows lenders to take account of other factors that may reduce risk, provided they can justify those decisions to the regulator.
Bank of Portugal vice-governor Clara Raposo acknowledged the change may lead some families to buy a slightly less expensive property than they had originally planned.
Simpler mortgage terms
The regulator has also simplified the maximum duration of mortgage loans.
Borrowers aged 35 or under can obtain a mortgage with a maximum term of 40 years, while those over 35 are limited to 35 years.
Previously, there were three age bands, with borrowers aged between 31 and 35 limited to terms of between 35 and 37 years. The average mortgage term in Portugal is currently around 30 years.
No more 100% finance on bank-owned homes
The Bank of Portugal has also removed an exception that allowed banks to lend 100% of the purchase price when selling properties from their own portfolios.
The standard loan-to-value limits now apply in all cases:
- 90% for a buyer’s main residence;
- 80% for second homes and other housing purposes.
Consumer credit also affected
The new recommendations extend beyond mortgages.
Personal loans are now generally limited to a maximum term of seven years, although loans for education, healthcare or energy transition projects can still run for up to 10 years.
Car loans also remain subject to a maximum term of 10 years.
Meanwhile, property leasing contracts have been removed from the scope of the recommendations, with the Bank of Portugal saying they have distinct characteristics and represent only a small share of the market.
Responding to a changing market
The central bank said it decided to tighten the rules after identifying growing risks linked to the rapid expansion of mortgage lending, accelerating house prices and a growing number of younger first-time buyers relying on borrowed finance.
Over the past 18 months, mortgage lending has accelerated alongside rising household incomes and stronger competition between banks.
The measures follow consultations with Portugal’s banking sector, consumer association DECO, the European Central Bank and other financial regulators.
While the Bank of Portugal says the rules are intended to protect borrowers and safeguard financial stability, some analysts argue they could make it harder for first-time buyers, particularly younger households, to qualify for a mortgage despite government schemes designed to help them enter the housing market.
