Property Purchase Process | Property Purchase Costs | Mortgage Finance

Overview:

Unless you're fortunate enough to be in a position to buy in cash, you'll be looking for a mortgage (hipoteca) to purchase your Portuguese property. Before you dive in, it's crucial to work out how you plan to pay for everything – not just the asking price of the property itself, but also all the extra costs involved not forgetting the cost of moving and any necessary renovations.

You will also need to consider the potential costs of changing money from pounds sterling into Euros. To purchase your property in Portugal you will need to convert your pounds sterling into Euros at some point. Although the price of your new home in Euros will be fixed, the ultimate cost in sterling will vary depending on how exchange rates move. There are many options to consider such as buying all your euros at the outset for a fixed exchange rate (called buying “for spot”). You should consult with an independent financial advisor or foreign exchange specialist who will explain your options.

Availability:

The good news is the Portuguese mortgage market is well developed and competitive, meaning that it's relatively straightforward for buyers – both domestic and foreign – to obtain mortgage finance. Not only is there the option of borrowing from Portuguese lenders but also there are a growing number of UK financial institutions lending on Portuguese property, to residents and non-residents alike.

• Mortgages are made on the basis of the lender's valuation, which the buyer will have to pay for. This value may be less than the price the buyer ultimately pays for the property
• All Portuguese mortgages are full status - proof of income and outgoings will be required
• Portuguese lenders assess an individual's eligibility based on their ability to service the loan and not potential rental income from the property
• As a general rule, lenders will work on the assumption that 35 per cent of an applicant's net income should cover existing financial commitments (e.g. UK mortgage/rent, bank loans, etc.) as well as the monthly repayment on the Portuguese loan
• If you are self-employed, your income is taken as the average of the last three years' net income from all sources
• All Portuguese mortgages should be fully repaid by the age of 75 and expect higher arrangement fees, perhaps up to 3 per cent
• Portuguese banks generally require mortgages and life assurance as security and require additional forms of guarantee for foreign investors
• Mortgage payments can be made monthly or quarterly

Banks are willing to finance building projects but probably not the initial cost of the land. Lenders will require life and building insurance for the final property value.

Rates of interest:

The Euro has historically been subject to lower interest rates than the pound meaning that Euro mortgages tend to be leant at lower interest rates than UK mortgages. A typical rate for a Euro mortgage in Portugal would be around 3%. Fixed or variable rates are available.

Loan-to-value:

As a rule, banks will finance, according to the financial standing of the borrower, between 60% and 80% of the assessed value of the real estate. Both foreign and Portuguese resident buyers' loans are capped at a maximum of 80 percent of either the valuation or purchase price (whichever is less). In practice, loans are usually for less than 70 per cent.

Repayment periods:

Portuguese banks can now set their own terms for the loan, under the supervision of the Bank of Portugal. Although contracts with a term of up to 50 years do exist, contracts normally have a term of 25 to 30 years. All mortgages should be fully repaid by the age of 75, and life cover is required.

UK mortgage providers by contrast will lend over shorter terms, typically 15 years.

A comparison of sterling and Euro mortgages for UK investors:

There is a wide selection of mortgage products available for the Portuguese property market. Repayment mortgages are the most common with endowment, pension-linked and ISA products also available. Interest-only loans are possible in some instances.

An obvious option for UK purchasers is to sell their main home in the UK in order to purchase their new home in Portugal . This might make sense if a UK purchaser is looking to relocate to Portugal permanently. However, if there is even the slightest chance that a purchaser might wish to return to the UK in future, it would normally make better financial sense for them to hold on to their UK property if at all possible. The UK market tends to grow at a consistently higher rate than many other European markets and by not owning UK property, there is a strong risk that an expat wishing to move back to the UK at a future date will find themselves priced out of the market.

If a UK investor is not looking to sell their UK home and does not have sufficient funds available to buy in cash, then there are two main ways of buying property in Portugal :

• Remortgaging your UK property:

  Remortgaging your UK property and taking out a loan in sterling is probably the simplest way to fund your Portuguese property purchase. However, you will need a substantial amount of unencumbered equity (i.e. the difference between what your property is worth and what you still owe on your mortgage) in your UK property or be able to demonstrate other financial resources such as a significant income in the UK. The two main disadvantages of sterling mortgages when buying in Portugal are exposure to exchange rate fluctuations and historically higher interest rates than the Euro zone.
  

• Taking out a Euro mortgage against your Portuguese property:

  Mortgages in euros secured against Portuguese property are available from both Portuguese and UK lenders. The interest rate of Euro mortgages is linked to the EURIBOR (European Inter Bank Offered Rate) which has been lower than the Bank of England rate for the pound since the Euro was first introduced. Taking out a mortgage in local currency can also to some extent insulate you against the risks of exchange rate fluctuations.
• The main drawbacks of Euro mortgages are as follows:
• Overseas mortgages are not under the protection of the UK Consumer Credit Act of the UK Mortgage Code
• The Portuguese mortgage system is mainly designed for permanent residents with significant constraints for second home buyers
• Set up charges for Euro mortgages are higher with a tax of 0.6 per cent on top of the mortgage advance payable on completion

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