How to get a mortgage in Portugal
If you are looking to buy property in the Algarve or Portugal, applying for a mortgage is the usual route to financing the purchase. Investing in property is a big undertaking, even more so, if you are doing so as a foreigner. Correct and professional advice is vital and can help you make the right decisions and save you money.
We asked Nicholas Martins, a licensed mortgage broker from Ideal Homes Portugal to answer some of the questions buyers have when looking to finance their property purchase:
- What types of mortgages are available?
- Do you have to be a resident in Portugal to qualify?
- What are the steps required to apply for a mortgage?
- What are the Portuguese terms used when speaking about mortgages and what do they mean?
- Watch the video and read the article for in-depth information.
Ideal Homes Portugal is a leading real estate agency operating across Portugal but with particular emphasis on the Algarve. The agency has an in-house and fully licensed mortgage brokerage service, licensed by the Bank of Portugal - Ideal Mortgages. Their mortgage service is completely free of charge to their mortgage clients.
Nicholas Martins: At ideal homes, we have a bilingual mortgage team, speaking English and Portuguese. We're here to help people that are looking for mortgages, not just by purchasing through Ideal Homes Portugal but for anybody that's looking for a mortgage, all across Portugal.
There are no costs whatsoever for brokerage fees. Our mortgage service is a free service for the clients, and we're here to help you.
Q. WHY IS INVESTING IN PROPERTY IN PORTUGAL A GOOD IDEA?
So, in my personal opinion, Portugal is a fantastic place to invest and to live in. I'm from the UK, and I've been living here in Portugal for the past 20 years. And if you look at, for example, the Ideal Homes team, most of them are from the UK or from South Africa, from the States or from Canada. And everybody has relocated and is living in Portugal at the moment and have set up their lives here.
Portugal is a gateway to Europe. By being in Portugal, in Lisbon, Porto, in Faro, you have access to all the major cities of Europe. Portugal is a safe country as well. The lifestyle in Portugal is fantastic - the culture and the cuisine. Portuguese food is lovely. Living in Portugal is not as expensive as it is elsewhere. For example, about 90% of our clients are from the States or from the UK. The cost of living in Portugal, the Portuguese lifestyle, it's much cheaper than in the US or the UK.
The property market here in Portugal, and particularly in the Algarve, is fantastic. Property value has increased and is increasing between 6% to 9% every year, and interest rates are lower in Portugal than for example in the UK and the US. Portugal at this moment is the right place to invest.
Q. WHAT SCENARIOS DO YOU SEE AMONG PEOPLE APPLYING FOR MORTGAGES IN PORTUGAL?
Normally two scenarios, this independent of which country the clients are coming from. We have scenario number one where the client already has a property chosen, has a property in mind. They have made an offer and they come to us for seeking a mortgage against that property. The client needs 70% finance, 80% finance - the client comes with to us with a property already chosen.
Then we have the second scenario, which accounts for 60% to 70% of cases. The client has no property chosen yet. They don't understand or they don't know exactly what percentage of finance they can afford, what amount of financing they can afford. So they contact us.
We send them an ideal homes inquiry form, to which they add some financial information. We assess that information and come back and give the client two important pieces of feedback.
First of all, based on the information they provide, we give them a pre-approval on what would be the maximum they can borrow here in Portugal. Then based on the maximum amount that they can borrow in Portugal, we give them a price range for properties they should be looking at, properties they can afford.
Let's imagine that the client can qualify for 200,000 Euro mortgage for example, for 80% Finance. We will tell that client that their budget for the property will be around the 300,000 Euro mark. So the client knows already their budget for the finance and for the property they wish to buy, making their property search more efficient.
Q. DO YOU HAVE TO BE A RESIDENT TO APPLY FOR A MORTGAGE IN PORTUGAL? WHO CAN APPLY?
You don’t have to be a Portuguese resident. Anybody in the world can apply for a mortgage in Portugal. There are different criteria applied if you are a resident here in Portugal or not, but anybody can apply for a mortgage in Portugal - if you are based in any European Union country, or if you're based outside the European Union, you can apply for Mortgages here in Portugal.
Q: WHAT TYPES OF MORTGAGES ARE AVAILABLE?
We get lots of questions about this. There are no interest-only mortgages here in Portugal at the moment. And there are no deferred capital mortgages. What we have are simple repayment mortgages, and the client will have three options to choose from.
First of all, you have the normal variable rate mortgage.
Variable rate mortgages are tied to Euribor for six months. Euribor is the base rate in Europe, set by the Central Bank of Europe. And it's reviewed, in this case, every six months. Then the bank applies its margin, spread, on top of the base rates. And this is what makes up the client’s interest rates.
If a client chooses a variable rate mortgage, it will be reviewed every six months. If the interest rate goes up, the monthly payments will go up. If the interest rate goes down, the monthly payments will go down. If the rate maintains the same, the monthly payments will be exactly the same.
A good thing about the variable rate mortgage is regarding the early penalty charges for paying off the mortgage earlier, or if a client wants to pay off some lump sums. By taking a variable rate mortgage, the early payment penalty is just 0.5% of the amount that is paid off.
A second option that the client has is a full-term fixed-rate mortgage. So let's imagine that I take a mortgage for 20 years or 25 years, I'm able to fix my mortgage for the full term of the process. The mortgage is fixed always in a timeline or brackets of five years.
The fixed rate is good, it gives you more security. You know that even if you're outside Portugal, in the US or if you're in the UK, you have to have a certain amount every month in your bank account to cover the mortgage payments. And you can hear about base rates going up in Europe, but you know that with your fixed mortgage, the mortgage payments will always be the same.
It is security, but of course security has its price. If you take a fixed-rate mortgage, the prepayment penalty, instead of zero to 0.5% as with a variable-rate mortgage, will be 2% of the amount you pay off. It's more expensive. But like I said security has its price.
There is a third option, which is a mixed fixed-rate mortgage. Let's imagine that the client takes the mortgage for 20 years, it can be fixed for five years, 10 years, 15 years, the client can choose, the time brackets are five years, how long he wants to fix the mortgage for. So, the client takes a mortgage for 30 years, he fixes it for 10 years. During the first 10 years, the monthly payments will always be the same. Once the 10 year fixed rate period is over, it reverts automatically to six months variable until the end of the mortgage term. Early repayment penalties are once again 2% of the amount paid off during the fixed rate period. Once it reverts to the variable rate mortgage, 0.5% of the amount paid off.
These are the three types of mortgages that the client can look at here in Portugal at the moment.
Q. CAN YOU TAK EUS THROUGH THE STEPS OF APPLYING FOR A MORTGAGE?
It is a very simple process. We only submit the mortgages to the banks once we have the full application and all the paperwork from the clients.
We have a dedicated mortgage team here – myself, Margarida and Carol. Once we receive a lead from a client, we send them a form to complete with some financial information. Based on this, we straightaway can give a pre-approval.
Once the client has a formal offer accepted on the property, and based on information on the pre-approval, we start the formal mortgage process. Based once again on the information that the client provides us, we will submit the application with two or three banks based on the criteria that the client wants. If the client does not want a certain thing we're not going to send it to a bank that only does that. We choose the banks that we sent the applications to in order to best suit the client's needs.
The clients complete the bank forms - we provide the list of necessary documents for them to email to us. Once we have everything in place, then either Margarida or Carol will guide the client through the formal mortgage process until completion.
On average, once we have all the necessary documents in our possession, it takes probably one to two weeks maximum, until we have the bank's approval. From then until the title deeds, another two to three weeks. So from the beginning of the process until the title deed, you're probably looking at one month, one month and a half, two months maximum.
Q: WHEN DO YOU RECOMMEND THAT CLIENTS APPLY FOR PRE-APPROVAL? BEFORE OR AFTER THEY HAVE FOUND A PROPERTY?
I think it is always a good time to make a pre-approval, because in my years of experience, when it comes to mortgages, it is very important for a client to do a financial qualification before looking at the property.
Otherwise, what could happen, you come into a real estate agents and you want to buy a property for €500,000, for example. And the agent will accompany you during one week or three or four days showing you properties around about this 500,000 Euro mark. Then when time comes, you do the financial qualification and you see that this might not match up. And it's disappointing for you because you've set your expectations for the €500,000 property but you realistically you should be looking at a 300,000 Euro property.
And sometimes it works the other way around. Sometimes the client thinks the limit is a 400,000 Euro property but it actually could be 1 million or 800,000 Euro property. So I think before even you have found a property, starting a pre-approval mortgage process is very important. The financial qualification lets you know your budget for a property and the maximum amount you can borrow.
Q. WHAT ARE THE COSTS OF GETTING A MORTGAGE IN PORTUGAL? DO YOU CHARGE FOR YOUR SERVICES?
Ideal homes brokerage fee mortgage fee does not exist. it's a free service to all our clients.
But clients do have to be aware of associated costs. The bank will levy fees. Besides the 20 or 30% deposit that the client will have to put down as minimum which is normal, the client should check if all the costs and fees are included or not in the deposit. The client should be looking always at having around about 7% of the purchase price for all the taxes, stamp duties, notary charges, registers, etc. In Spain, for example, you'll be looking between 10 and 12% of the purchase price for the property for the expenses, here in Portugal, we're looking at around 7% of the purchase price for the expenses. So the client should be always looking at 20 or 30% deposit plus another 7% on top.
Q: IS LIFE INSURANCE A REQUIREMENT WHEN GETTING A MORTGAGE?
This is very important and sometimes clients do not realize this. Some banks do have life insurance as mandatory, others do not. This all depends on which bank, which mortgage lender provider, we'll be looking at. But in general, if a client is looking for an 80% mortgage, the bank will oblige the client to subscribe to life insurance. We do have some lenders here that if you opt for 70% finance, they will not oblige you to subscribe to life insurance.
Regarding life insurance - this is very important. The client can opt for life insurance from the bank. However, many buyers are 45 years of age plus. And the payments on the life insurance are going to be very, very expensive. We have agreements with independent insurance companies that will allow the client to subscribe life insurance, but probably paying half of the monthly installment compared to the rate with the bank. And these insurances will be accepted by the bank.
So, in summary, the client has a choice if he does not want to take life insurance at 70% Finance. At 80% Finance, he will have to take life insurance. But we can help out afterwards, indicating to them independent mortgage insurance companies that will cut their monthly payments down regarding the life insurance.
Q. CAN YOU EXPLAIN SOME OF THE PORTUGUESE TERMS USED WHEN DISCUSSING MORTGAGES?
So basically, regarding the mortgage criteria, there are two main terms. First of all, it's the percentage of finance called LTV - the loan to value. It's the finance that the client is requesting against the property value, the purchase price of the property.
The second criteira is the debt-to-income ratio. This is a very important factor and is a 90% guideline if you will get a mortgage in Portugal or not. This debt-to-income ratio cannot exceed 35%. Banks call this Taxa de Esforço or TE. So we have LTV - loan to value and TE – taxa de esforço, which is the debt to income ratio.
When looking at a simulation, interest rates in Portugal will appear as TAN – Taxa Annual Nominal.
You will see the base rates on a simulation, which is called Euribor, you will see a spread which is the bank's margin below, and you will see TAN below this, which is interest rate - the Euribor plus the spreads.
Then we have the TAEG, which is the total cost of the mortgage that appears on the simulation. This is made up by the interest rates, plus any additional bank products - insurances, credit cards, payments into account etc. This will affect the total cost of your mortgage and will appear as the TAEG.
Then finally, we have the MTIC which is the total cost in figures of the mortgage for the client. The client can see how much a 200,000 Euro mortgage will it have cost by the end.
And when you compare simulations from each bank, don't just look at the spreads. But look at the MTIC because sometimes there can be lower spreads from a certain lender, but then the mortgage costs will be higher because of all the background products that the bank adds into the deal.
Q. IF YOU COULD GIVE ONE PIECE OF ADVICE TO SOMEONE LOOKING FOR A MORTGAGE WHAT WOULD IT BE?
It is one thing to buy property in your own country. It is quite another to buy property abroad. And if you're not familiar with the process of purchasing a property and getting a mortgage in that specific country, sometimes bad things can happen. People can be misled, people can be given the wrong information.
I would advise working with a certified mortgage company, a certified mortgage broker. A broker has to be certified by the Bank of Portugal. The company website, or on the office door, if it is licensed by the Bank of Portugal as a mortgage provider, mortgage broker, it has to say that. Only licensed mortgage brokers, licensed by the Bank of Portugal are authorized to give professional advice and take care of mortgage applications for the clients here.
At Ideal Homes Portugal, this is the case – we are licensed by the Bank of Portugal. I myself have more than 16 years of experience in mortgages. We have a full professional mortgage team to help you.
And besides this, we give you free advice, for example, on life insurance, at no cost whatsoever for you. If you do not have a lawyer, we work with fantastic professional lawyers, which we can recommend for you. Regarding currency exchange, we work very closely with Moving Currency, led by Claire - the best person to turn to, if you're looking to send currency over from the US, UK to Portugal. She can quote you better rates than any bank. Our rentals team can assist you after you have bought the property with renting it out and managing your property.
We have a full-service package for clients. Working with Ideal Homes Portugal you're choosing the full package that will guide you with 100% professionalism, from the property search, the mortgage application, lawyers, tax advice, life insurance, after-sales team and the rentals team. In my opinion, this is a fantastic service for the client.