Banco de Portugal applies macroprudential measure to new housing and consumer loans

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As a macroprudential authority and by deliberation of the Board of Directors of 30 January 2018, Banco de Portugal approved a recommendation that introduces limits to some of the criteria used in the assessment of customers' solvency, covering the granting of new mortgages, credits with mortgage guarantee or equivalent and consumer credits. 

This macroprudential measure is applicable to contracts signed from 1 July 2018 onwards and covers all credit institutions and financial companies, with headquarters or branch in Portugal, authorized to grant this type of credit in Portugal._cc781905-5cde-3194 -bb3b-136bad5cf58d_

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Three types of limits are established:

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• to the ratio between the loan amount and the value of the property pledged as collateral (LTV – loan-to-value):

  • 90% for loans for own and permanent housing;

  • 80% for loans for purposes other than own and permanent housing;

  • of 100% for credits for the acquisition of properties held by the institutions and for real estate financial leasing contracts.

• of 50%, to the ratio between the amount of the monthly installment calculated with all the borrower's loans and its income (DSTI - debt service-to-income), with the following exceptions:

  • up to 20% of the total amount of credit granted by each institution covered by this measure, each year, may be granted to borrowers with STDs up to 60%;

  • up to 5% of the total amount of credits granted by each institution covered by this measure, in each year, may exceed the limits established for the DSTI.

  For the calculation of the DSTI, the monthly installments of the new credit agreement must be calculated assuming that they are constant throughout the term of the agreement. In the case of variable and mixed interest rate contracts, the impact of an interest rate increase must be considered. In the calculation of the DSTI, a reduction in the income of the borrower(s) must also be accounted for when, at the expected term of the contract,  the borrower is over 70 years of age, unless , at the time of the creditworthiness assessment, the borrower(s) are already in retirement.

• to the original maturity of the loans:

  • of 40 years in new mortgage loans and mortgage-backed loans or equivalent, and gradual convergence to an average maturity of 30 years by the end of 2022;

  • from 10 years to maturity in new consumer credit contracts.

The applicable limits for loan-to-value, debt service-to-income and maturity must be observed simultaneously.

The limits now introduced correspond to maximum values and, as such, do not replace the obligation for institutions to assess the adequacy of the values of the different indicators and other criteria used in the assessment of the solvency of each borrower.

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The macroprudential measure also establishes that credit agreements must have regular payments of interest and principal.

In a context conducive to a further reduction in the degree of restrictiveness of the criteria for granting credit, characterized by interest rates at historically low levels, economic recovery and a rise in real estate prices, Banco de Portugal seeks to ensure with this measure that credit institutions and finance companies do not take excessive risks in granting new credit and that borrowers have access to sustainable financing. 

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The measure is adopted by Banco de Portugal in the form of a Recommendation, based on the principle of “compliance or explanation”. The target institutions must respect the limits applied; otherwise, they will have to justify. Banco de Portugal will assess the adequacy of the justifications provided by the institutions.

Recommendation in the context of credit agreements concluded with consumers*

(applies to contracts concluded from 1 July 2018)

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 Banco Portugal - bancoportugal.pt