This article will help you understand everything about how to finance a property purchase in Portugal as a foreigner, including mortgage options, loan-to-value ratios, and additional costs.
1. Proof of Income
To obtain a mortgage, you need to prove your financial capability. Portuguese banks require documents that verify your income, such as:
- Salaries
- Recurring financial investments
Providing proof of stable and sufficient income is crucial as it demonstrates to the bank that you are capable of repaying the loan. Banks typically require several months of bank statements, tax returns, and employment contracts.
2. Age Limit for Finance a Property in Portugal
Your age significantly impacts the loan term. Generally, the rule in Portugal is that you can finance the difference between your current age and the maximum age limit of 75 years. For instance, if you are 45 years old, you can finance for up to 30 years (75 – 45 = 30). This age limit ensures that the loan is repaid before reaching an age where income might become more limited, such as retirement.
3. Loan-to-Value (LTV)
Before diving into the market, it’s essential to understand how to Finance a Property in Portugal. This includes researching the Loan-to-Value (LTV).
The Loan-to-Value (LTV) ratio is used by banks to determine the loan amount relative to the property’s value. Simply put, the LTV is the percentage of the property’s value that the bank is willing to finance. In cities like Lisbon, the LTV can reach up to 70%.
However, for bank-owned properties, the LTV can go up to 100%, although finding good properties still held by banks has become increasingly difficult.
It is important to note that the LTV is determined by a bank evaluator and is usually lower than the actual purchase price. This conservative approach is taken to mitigate the bank’s risk and can affect how much of the property price is financeable. For example, if the evaluator values the property at €280,000 but the purchase price is €300,000, and the LTV is 70%, the bank will only finance €196,000 (70% of €280,000), requiring the buyer to cover.
4. Spread and Euribor Rate
Recently, some banks in Portugal have been offering attractive conditions such as a 0% spread plus the Euribor rate for the first two years of the loan.
- Spread: This is the bank’s profit margin on the loan. A 0% spread means that initially, you will only pay the Euribor rate.
- Euribor: This is the reference rate for euro-denominated loans between banks in the Eurozone. After the initial two years, you can opt for a variable rate, which is the sum of the Euribor plus a pre-agreed spread.
The Euribor rate is a benchmark that fluctuates based on market conditions. A variable rate mortgage indexed to Euribor will change periodically, typically every three, six, or twelve months, reflecting the current rate plus the spread. This can lead to lower payments if rates drop, but higher payments if they rise.
5. Additional Costs to Finance a Property in Portugal
Beyond the interest, opening a mortgage entails additional costs such as:
- Loan arrangement fees
- Property valuation fees, which can be around €280.
- Notary and registration fees, which can add up to approximately €1,200.
- IMT (property transfer tax), which ranges from 2% to 8% depending on the property’s value.
- Stamp duty, which is typically 0.8% of the property price.
- Mandatory life insurance, which protects the loan balance in case of death or disability.
These costs can significantly impact the overall affordability of the mortgage, so it’s important to factor them into your budget.
6. Approval Time
The approval time for a mortgage can vary, but generally, if all documentation is in order, the process can be completed within two weeks. This relatively quick approval time makes the Portuguese property market attractive, especially for buyers looking to move quickly.
7. International Comparison
Compared to other countries, interest rates in Portugal, considering the Euribor rate, are among the lowest. This makes Portuguese mortgage financing an attractive option for foreigners, who might find it beneficial to maintain investments in their home country while financing in Portugal due to favorable conditions.
For example, while interest rates in some countries can exceed 4%, Portuguese mortgage rates, with the Euribor, can be as low as 1-2%, depending on the terms and the bank. This difference can lead to substantial savings over the life of the loan.
8. Assistance from A&D Consulting
AED Consulting provides comprehensive support at every stage of the process, from finding the ideal property to recommending the best financing paths. Our goal is to ensure you make the best choice with peace of mind and security.
We assist with:
- Navigating the legal and regulatory requirements
- Connecting with reliable mortgage brokers and banks
- Providing insights on market trends and property valuations
- Offering tailored advice based on your financial situation and goals
By leveraging our expertise, you can avoid common pitfalls and ensure a smooth transaction.
INTERESTED IN FINANCE A PROPERTY IN PORTUGAL? CONTACT US AND LET US HANDLE YOUR PROCESS SEAMLESSLY
