Rules that prohibit banks from advancing loans that require 50% of more of a person’s income to service, come into force on July 1st.
The Bank of Portugal edict creates limits on the granting of new mortgages and personal loans, and attempts to restrict banks’ commercial freedom to assess customers on a case-by-case basis.
The banking regulator justifies the move as a way to limit banks from taking excessive risks on personal lending.
These limits were pushed forward after the Bank of Portugal admitted in the Financial Stability Report in early June that there are "some signs" of overvaluation of real estate prices, "albeit limited."
For now, these rules are recommendations - although banks that do not comply have to explain why they have lent over the new limit but in May the governor of the Bank of Portugal, Carlos Costa, (pictured, hard at work) stated to parliament that if banks do not respect the lending limits, he will turn his recommendations into binding orders.
The banking supervisor already has made exceptions, allowing banks to exceed the new lending limit on 5% of their total loan book each year and allowing one-fifth of the total amount of loans to have repayments at 60% of the customer’s income.
When analysing a debtor's capacity to repay, banks also must take into account factors such as a 3% increase in the bank rate and a decrease in monthly income in the case of customers who, at the end of the contract, will be older than 70.
As for the loan-to-value ratio for mortgages, the Bank of Portugal recommends this should not exceed 90% of the value of the primary residences.
To help banks shift their own stock of repossessions by offering attractive mortgage deals, they will be allowed to offer 100% mortgages and have the ability to value their properties at the upper end of the 'price per m2.'
The Bank of Portugal recommends a maximum of 40 years as a limit for mortgages and remortgages with consumer credit limited to ten years.
These new rules may restrict the more enthusiastic practices of many banks before the recession, those that are still in business anyway, but fail to represent a tightening of consumer credit as the State relies on a healthy housing market. This brings in tax revenue and VAT income from new owners buying kitchens and undertaking property refurbishment.
