A buyer's guide to mortgages in Portugal
If you're looking to buy property in Portugal, find out how much you can borrow, mortgage options for expats, mortgage calculators and costs of getting a mortgage in Portugal.
If you're tempted by houses for sale in Portugal, you will typically find no restrictions and a favourable visa program for international buyers, although whether you are a resident or non-resident in Portugal will influence how much you can borrow. This guide explains what you need to know about the mortgage system in Portugal.
Should you buy property in Portugal?
If you are interested in buying Portuguese real estate, the housing market in Portugal presents certain opporunities while mortgage interest rates are at historical lows and housing prices, although depressed for years after the real estate collapse of 2008, are starting to show signs of recovery. Read more about buying property in Portugal.
Portugal's housing recovery is fuelled partly by the relative strength of the US dollar against the euro and a surging interest among the British in Portugal’s golden visa program following the UK's EU-exit vote. The program fast-tracks the Portuguese residency process for those who buy property worth EUR 500,000 or more. At the time of writing, there was enough international interest in Portuguese real estate that the golden visa program administrators were backlogged several months with new applications.
Portugal’s overall economy also continues to improve with an estimated growth of 1.6 percent for 2016 and falling national debt. Although Portugal is not yet favoured as a core performing European market, there could be potential for better yields in the long-term for risky investors.
How much can you borrow in Portugal?
There are no restrictions on non-EU residents from buying property in Portugal and the government does what it can to encourage foreign investment, such as the golden visa program mentioned above.
However, most banks will loan only up to 65 percent of the assessed value of the property or the sale price, whichever is lower, for non-residents. Fiscal residents in Portugal – those who pay taxes in Portugal – may be able to find opportunities to borrow up to 85–90 percent of the sale price, but finding such mortgages in Portugal may require the assistance of an experienced mortgage broker.
All mortgage providers in Portugal will typically review your financial position. Most mortgage lenders will not allow the sum of any existing debts and your new mortgage payments to exceed 35 percent of your monthly income after tax income, however, you may be able to find lenders that will allow you to borrow up to 40 percent of your monthly income.
Many Portuguese mortgage providers and banks have online mortgage calculators on their websites. Most of these are standard monthly calculators that take into account your net borrowing, mortgage insurance and property tax, then calculate an estimated monthly mortgage amount. Some also provide an estimated amortisation table. The mortgage calculator here also provides links to various lenders and their mortgage products after clicking the calculate button.
Cost of getting a mortgage in Portugal
Mortgage lenders in Portugal have generally been averse to following the negative Euribor rate, with interest rates for prime borrowers hovering between 3.25 percent and 5.25 percent, depending on the specific of the loan, although lower mortgage rates may be offered in certain situations.
Taxes and fees for the total buying and mortgage process can mount quickly. Most fees are are a percentage of the purchase price with the notable exception of notary fees. Notaries work for the Portuguese government and are charged with ensuring the property transaction is legal, properly recorded and all fees are paid. The old fee structure used to be tied to the purchase price. Now, however, the notary charges approximately EUR 153 per transaction plus EUR 1.25 per amendment or document clause. Nonetheless, for estimating purposes, buyers can still use the old 1–2 percent of the purchase price rule of thumb.
The type of tax that will be due on the signing of the deed depends on the type of property being purchased. Resale properties have traditionally incurred a transfer tax using a variable rate based on the property value and purpose of the property, with rates potentially reaching 8 percent of the property’s value in certain cases. However, this tax will reportedly be phased out by 2018 and replaced by a stamp duty of between 0.2–0.8 percent of the property value. New properties will incur a VAT charge, currently at 23 percent.
Mortgage-related fees can include:
- Deed registration – 1 percent
- Mortgage arrangement – 1 percent
- Mortgage administration – 1 percent
- Non-refundable commitment fee – around EUR 600
- Survey and appraisal – EUR 500–800
- Legal fees (optional) – at least EUR 1,000
In addition to the taxes due upon buying a Portuguese property, buyers may be subject to income tax on rental income or capital gains tax when the property is sold.
For non-residents rental income is taxed at a flat rate of 28 percent. Property owners can deduct the annual costs of maintenance, repairs, insurance and municipal taxes as business expenses before calculating total tax due. However, neither mortgage interest nor mortgage insurance is deductible.
Residents add rental income to other income sources and calculate the income taxes at the standard rates:
Capital gains tax for non-residents is charged at a flat rate of 28 percent and is payable at the time of sale. Residents add their capital gains to their income, to be charged at the standard tax rate. If the sale proceeds are used for the purchase of another Portuguese property, only 20 percent of the net gains are taxed in the sale year. If the home was a primary residence, 50 percent is added to the income tax in the year of the sale – unless the proceeds are used within two years to purchase another primary residence, in which case the gains are tax exempt.
A notable issue for Portuguese tax purposes is that non-residents are taxed only on their Portuguese income. Residents, on the other hand, are taxed on their world-wide income, subject to double-taxation treaty considerations. Because residency can be triggered by being in Portugal more than 183 days in a given calendar year or by owning a property which the government considers a ‘habitual’ residence, those seeking to invest in residential real estate in Portugal may wish to seek the advice of Portuguese tax expert for proper tax planning. You can read more about taxes in Portugal and Portuguese visas and permits.
Documents to apply for a Portuguese mortgage
When preparing to take out a Portuguese mortgage, you may be asked to present the following documents as either originals or certified copies:
- Photo identity
- Current proof of residency, if applicable
- Proof of income – such as your latest pay stubs, income taxes and an accountant’s statement of your financial status
- Documentation of existing rent, mortgage and debt obligations
- Bank statements – last 60 days of incoming and outgoing cash flow
- Proof of deposit – last 60 days to show source of funding
- Property details – purchase commitment or sales contract
Property details can include a property plan, tax registration showing that property taxes are current, land registry documents showing the current owners and any encumbrances, a habitation licence outlining the home is habitable, survey and valuation assessment, and an energy rating certificate.
Also, in order to pay the taxes due upon signing the transfer deed, you will need to have a fiscal number in Portugal and may want to open a bank account in Portugal. Your fiscal number can be obtained at a local tax office. Read more in taxes in Portugal
How to apply for a mortgage
Once you have your financial status documents ready you can begin shopping for a mortgage on a pre-approval basis. Banks may charge a non-refundable commitment fee of up to some EUR 600 for loan amounts up to EUR 750,000, with higher fees above this level. A pre-approval can take about five business days.
Once you’ve selected your dream Portuguese property and have either an accepted offer or a sales contract in place with the seller, you can bring the remaining documents to your mortgage lender and follow an application process that is similar to much of Europe.
- Barclays – international bank
- Santander Totta – Portugal’s leading non-resident mortgage provider
- Quinta Finance – national Portuguese bank
- The Q Kapital Group – international mortgage financers
Types of Portuguese mortgages
Since the housing market collapse of 2008, Portuguese lenders have become more conservative on the types of mortgage products they offer. Interest-only products are usually only offered for new constructions, and typically only for a two-year term. Virtually all mortgages are principal plus interest loans, though banks offer both fixed and variable rate mortgages. Some variable-rate mortgages also allow for the same monthly payment or a capped payment and vary the length of the loan accordingly.
Most mortgages in Portugal run for 25 years, but you can get terms up to 30 years. Banks vary in the maximum allowed age of borrowers, which can limit the term a given institution will allow. Most banks will not offer a mortgage to individuals 70 years or more, but some will extend this limit to 80 years.
All Portuguese mortgage products will require a first lien, or 'mortgage guarantee', against the property. You can talk to your financial provider, or shop around, for insurances in Portugal.
Portuguese mortgage guarantees
Portugal does not have a state-sponsored program, which can be found in some countries with more ambitious programs to include sub-prime buyers in homeownership. While this lack of state involvement may preclude some buyers from entering the Portuguese housing market, it is likely to continue while increased pressure from the IMF pushes Portuguese banks to continue strengthening their balance sheets and recover from recession.
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