Interview with property owner in Portugal
Read this interview to get more insights about buying property in Portugal from abroad.
Mortgage options in Portugal
If you're buying a property in Portugal, you may be fortunate enough to have found a cheap rural property which you can buy cash down, or you may have funds from sale of a property or business, or an inheritance which you can use to purchase a property without requiring finance. However, most purchasers will want to finance part of the purchase price with a mortgage, and you'll need to think carefully about your borrowing options.
There will always be a currency mismatch, for instance, unless you're borrowing in euros. If you borrow in your home currency, you'll be exposed to currency fluctuations which could mean the value of the mortgage might eventually exceed the value of the property, if your home currency weakens. On the other hand if you borrow in euros but finance the mortgage with income in another currency, your monthly payments will fluctuate; if your home currency weakens, you might find it difficult to afford the payments.
You'll want to think carefully before you make a choice, and perhaps allow yourself a 20% margin to ensure you don't get overstretched.
For home owners with significant equity in their own home, remortgaging that property to help pay for a Portuguese home can be a sensible option. However, if things go wrong, you are putting your own home at risk. You might also find the interest rate you'll be paying is higher than what you would pay if you borrowed in Portugal, where interest rates are very competitive.
One possible advantage is that you might be able to get an interest-only mortgage at home - though these are almost universally more difficult to access since the credit crunch. There are no interest-only options in Portugal. If you have, for instance, a large long term investment portfolio, it could make sense to borrow interest-only rather than sell off investments, particularly if they are tax-efficient (like ISAs).
Many banks offer international mortgage services for other countries in which they have operations. Barclays, for instance, lends for Portuguese properties as well as to purchasers of property in France, Spain and Italy. However, many banks don't lend for international properties or restrict their lending to particular types of property or locations. While going this route helps get over the language issues, it may not give you the best choice of deals or the best interest rate.
Portuguese banks are happy to grant mortgages to non-residents. You could go directly to one of the big banks - Santander, Novo Banco, BBVA, EuroBic or Bankinter - but local branches have considerable autonomy, and you might have to approach several to find the right deal. Language, as so often, can also be an issue - remember, even if you speak Portuguese, there's a lot of very specific vocabulary involved in finance which can make it hard going. A better option is to use a mortgage broker, who is used to dealing with this type of transaction, knows exactly which banks and branches to ask, and can probably secure you a better rate.
Interest rates are usually variable, based on Euribor plus a percentage (12-month Euribor is currently -0.16%), but up to 20 year fixed rates are available. If you fix you'll be paying a premium - for instance, 2.99% against 2.25% variable - but if you think rates are likely to rise, you may think it's a premium worth paying.
Generally, non-residents can get a 25 year mortgage, and residents up to 30 years. Residents also have an advantage when it comes to loan to value; non-residents will have to put up a 30% deposit, but residents are only asked for 20%. Residents and non-residents are equal, though, when it comes to two of the less lovely things about getting a Portuguese mortgage - a lot of paperwork and high fees (around EUR 600).
Here you can see the real example of the loan related expenses, the deal has been closed in 2017, house price is EUR 118.500 and the bank loan (80%) - EUR 102.200 (please read our interview with property owner).
Portuguese mortgages are also subject to strict affordability criteria. Your mortgage payments must not amount to more than 30-35% of your net monthly income. There's no such thing as a buy-to-let mortgage in Portugal, so that rental income won't be taken into account in assessing your loan, only your own income.
|Mortgage loan related expenses||Payment (EUR)|
|Translation of documents (when required)||147,38|
|House evaluation fees||196,80|
You may also find that certain types of property aren't easy to find mortgages for. Rustic properties, particularly where drastic renovation is required, could be tricky to finance - so could properties with major refurbishment required even in the cities. In that case, remortgaging your existing property is probably a better route.
A final tip, when you're working out your budget and what you can afford; don't forget to factor in transfer taxes and legal costs. In Portugal, they can account for up to 10% of the property price, so you need to ensure you can handle those as well as the required deposit out of your cash reserves.