New credit concession rules come into force

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New mortgage rules aimed at limiting defaults came into force this month.

Under the new rules, it is now illegal to provide more than 90% of the value of the property on home loans.

Also a 50% ceiling on the ratio between the monthly mortgage amount calculated together with all the mortgagee’s other loans, their income and a maximum mortgage maturity of 40 years.

The new tighter laws on home loans credit concession came into force on Sunday 1 July, as stipulated by the Bank of Portugal. The new law was passed in February which introduced limits to some of the criteria used in evaluating the solvency of clients.

The new rules not only govern mortgage concession but also bank loans and consumer credit. 

“This macroprudential measure applies on all contracts signed from 1 July 2018 and covers all financial institutions such as banks and mutual associations and credit institutions with their headquarters of branches on Portuguese national territory and which legally are authorised to grant such credits” states the BdP. (Banco de Portugal.)

“Within a context which is favourable to an additional reduction in the degree of restrictions to credit concession criteria characterised by historically low interest rates, economic recovery and increases in property prices, the Bank of Portugal through this measure seeks to guarantee that credit institutions and financial companies do not take on excessive risks in granting new credit and that those taking out loans and home loans do so in a sustainable way,” it states.

The measure has been adopted by the Bank of Portugal as a “recommendation” based on the principle of “compliance and explanation”.

Institutions covered by these regulations should respect the limits agreed and if they don’t they must justify the reasons why they have not. 

Portugal’s central banks states that there are three types of limits which should be met at the same time, the most important being: the ratio between amount of loans and value of the property provided as a guarantee (LTV – Loan to Value), which is 90%, 80% for other non-home loan credits and 100% for property purchase loans held by institutions and for leasing purposes.