Even if mortgage-related chitchat doesn’t get your juices flowing it is a super important area to consider

Mortgages - What are they? Can I get one? Do I need one? How do I get one? Where do I get one? Why should I get one? It’s amazing how many questions and queries there are about this, quite frankly bland and unexciting, topic!

However, even if mortgage-related chitchat doesn’t get your juices flowing it is super important to think about it now that you have decided to buy a property in Portugal. Give some thought to how you will finance your purchase - will you up-sticks completely, sell your home and use that money to buy here? Would you consider remortgaging to release some equity to keep a nest egg back home? Are you in a position to be a cash buyer? Or will you – like many - choose to get a mortgage over here?

Before we dive in, let’s get some mortgage basics out of the way, starting with what does the word “mortgage” even mean?

A mortgage is an agreement between you (the borrower) and a mortgage lender to buy or refinance a home without having all the cash upfront. Taking out a mortgage to fund your purchase is a great idea for many reasons, it allows you to up your budget so that you can buy the property you want, and a small mortgage or bridging loan can allow you time to organise your finances so you don’t lose out on that perfect option. It can also be a shrewd financial decision even if you have the full amount to purchase the property to free up funds for other investments. However, remember this agreement gives lenders the legal right to repossess the property if you fail to meet the terms of your mortgage by not repaying the money you’ve borrowed plus interest.

Whatever your motivation is for taking out a mortgage we know you may have some questions so keep reading to find out about the basics of the mortgage application process.

Mortgage jargon:

• APR Annual percentage rate: The overall cost of a mortgage, including the interest and fees.
• Arrears: If you go into arrears, it means you have 'defaulted' at least once on your mortgage repayments, ie you have missed a month's payment.
• Buildings insurance: Insurance that covers you for damage to the structure of your home. A lender will require you to have this in place when you take out a mortgage.
• Capital: The amount of money you borrow to buy a property.
• Deposit: This is the amount you are required to put down towards the cost of the property. In Portugal, this ranges from 20-to 40%.
• Early repayment charges: Penalty fees you have to pay if you want to leave your mortgage during a specified period, usually the period of the initial deal. 
• Equity: The amount of the property that you own outright.
• Euribor rate: A rate set daily by a panel of European banks and is generally an indicator as to what rate European banks will lend to each other.
• Fixed-rate mortgage: The mortgage interest rate stays the same for the initial period of the deal, which can be anything from one to 10 years. This means you can be sure of exactly what you will be paying on your mortgage each month, as your rate won't go up - or down.
• Flexible mortgage: This allows you to overpay, underpay or even take a payment holiday from your mortgage. This can help you pay off your mortgage early and save money on interest, but flexible mortgages are usually more expensive than conventional ones.
• Guarantor: A third party who agrees to meet the monthly mortgage repayments if you are unable to. This is most common with first-time buyers, and the guarantor is usually their parent or guardian.
• Interest-only mortgage: You only pay the interest on your mortgage each month, without repaying any of the capital loan itself. The idea is that you build up enough money to be able to pay off the mortgage at the end of the term in other ways.
• Monthly repayment: The amount you pay your mortgage lender each month. If you're on a repayment mortgage (the most common kind,) the payment will cover a percentage of your mortgage plus interest.
• Mortgage term: The amount of time you are taking the mortgage out for – 25 years, for example.
• Negative equity: When the value of your home falls to a level that is below the amount remaining on your mortgage.
• Remortgage: When you change your mortgage without moving house. You can do this to save money, change to a different type of mortgage or release equity from your home.
• Repayment mortgage: You pay off the mortgage interest and part of the capital of your loan each month. Unless you miss any repayments, you are guaranteed to have paid off the mortgage by the end of the term.
• Standard variable rate: The default mortgage interest rate that your lender will charge after your initial mortgage deal period ends. This could be higher or lower than your original rate.
• Variable-rate mortgage: The interest rate on your mortgage can go up or down according to your lender’s standard variable rate.

Now we have looked at some of the jargon you will hear when looking for a mortgage where can you get one in Portugal?

There are a multitude of high street banks in Portugal that now offer very good, personalised services. At the start of your search, during one of your early visits to Portugal, it is a good idea to meet with several banks – not just to talk about what options they have – but to find a bank that you are comfortable working with, speaks your language and can answer your questions clearly and concisely. We can make the initial appointments for you and accompany you if you wish, to start putting the wheels in motion.

Be aware, that banks here will ask for more information than you might be used to giving back home, they build up a paper-based profile rather than an online one. To process a mortgage application documentation needed can include:

There are many factors to think about when deciding which mortgage product is best for you. Some banks have a mandatory requirement for life insurance, other lenders may have more competitive rates but a cap on the level of borrowing, whilst some may not offer fixed rate products. One important aspect that many people are unaware of is the different ways a bank will analyse your affordability for a certain loan amount, some banks will stress certain types of income streams more heavily than others and some may not consider rental income so it is important to start your mortgage investigations sooner rather than later to ensure that you get the right option for you.

What are your options?

Most Portuguese banks will offer you a mortgage based on either a fixed or variable rate scheme.

Variable-rate mortgage

The interest rates of a variable rate mortgage are linked to either the three or six-month European Central Bank - Euribor - rate and increased by the margin that the bank applies. The Euribor rate is set daily by a panel of European banks and is generally an indicator as to what rate European banks will lend to each other.

Fixed-rate mortgage

A fixed-rate mortgage allows you to budget for future mortgage payments as the monthly cost will remain constant throughout the fixed-rate period and you are protected from future increases in the European base rate. The fixed-rate period can range from one to 30 years. After the fixed-rate period expires the mortgage will automatically convert into a variable rate mortgage.

How does it work?

The banks will take your financial position and property valuation into consideration when analysing your mortgage file for approval. They will require proof of your current income earnings, dividend payments, investment income, pension income and rental income. The banks consider the net income of each applicant which is confirmed by pay/pension slips, tax returns and bank statements.

The lender will also require information about any existing debts and employment history. All this will help them decide if you will be financially comfortable meeting the costs of your monthly Portuguese mortgage.

They will use what is known as a debt-to-income calculation as the basis for deciding whether applicants will qualify for a mortgage. In basic terms, this means that your monthly debt commitments, including the new mortgage, must not exceed a given percentage of your net monthly income, typically 30-35%.

There are other variables to consider but this gives a basic idea of how banks assess the applicants for the mortgage.

Let’s talk numbers:

For non-residents who pay their taxes outside Portugal, the maximum mortgage amount is around 70% of the purchase price (or valuation if lower) some banks have a maximum of 60%.

For fiscal residents who pay Portuguese taxes, the maximum mortgage is 80%.

If you are over the age of 60 and receive a pension you can have a mortgage in your name. It is possible to appoint a guarantor to secure the borrowing, which can have potential inheritance tax benefits if they are also part-owner of the property.

For those wishing to build their homes, banks offer construction mortgages. These are complex but broadly speaking you can potentially borrow 50-60% of the land and construction costs combined.

If you are buying for commercial use the maximum mortgage is 50% of the price (or valuation if lower.) If you intend to run a business the lenders will ask for business plans and, where applicable, accounts for any previous business operating at the premises, as well as what previous experience you have.

To recap …

• A mortgage is a type of loan you can use to buy a home.
• It’s an agreement between a lender and a borrower.
• Knowing some of the basic mortgage lingo ahead of time can help you understand exactly what you’re signing up for.
• There are different types of mortgages and different types of interest rates.
• Make sure you start your mortgage hunting sooner rather than later.