Frozen Bank Loan Payments – How it Affects Algarve Real Estate

The number of frozen bank loan payments held by realtors in Algarve continues to plunge in July, with the value of loans deferred by consumers decreasing by 50% as the economic recovery gains a bleak momentum.  According to Mario Centeno, Portugal’s central bank chief, consumer withdrawal of frozen bank loan payments is progressing well, with bad debt continually plummeting to incredibly low levels.

In light of the COVID-19 pandemic, new measures that allowed borrowers to temporarily freeze their loan payments were primarily geared to help them recuperate from dented personal finances. While different banks set their specific terms for freezing bank loan payments, the cuts in installments will range between 1.1-1.67%, which means that monthly mortgage installments will decrease. This is undoubtedly good news for all Algarve residents who took out loans to finance their homeownership, but the speculation about which direction mortgage rates will move has become a culture in the financial industry.

Property Prices to Drop with the End of Loan Repayments

In a recent financial report, the suspension of loan repayments until September 2021 could scathe house prices in Algarve. It all began when the Portuguese Government suspended loan repayments until March 2021, followed by an extension of another six months to avoid bad debt. The erosive effect on house prices has been widely epitomized in the apartment sector, where the real estate supply threatens to overtake residential demand.

This moratorium suspension – loan repayments that include household mortgages – has helped families benefit from non-payment of capital installments on loans but will resume interest payments in September. While this could mean holding out for approximately nine months for buyers, sellers may have to wait for an ideal selling window shortly before September.

Impact of Housing Price Decline

According to a report by algarvedailynews.com, plummeting housing process makes consumers default on their home loans, consequently causing financial institutions to lose money. Aside from forcing banks to shut down, the dry-up of home equity means fewer funds are available for consumers to spend, save, invest and pay down their debt.

“Although banks are better centralized today, another decline in housing prices could directly impact them, particularly because private individuals froze over 14.7 billion euros,” says an analyst for the platform Monederosmart. “With mortgage payments making up 90% of that amount, regulators are keeping a keen eye on the sector, but the turn-out of events in the 2008 housing crisis could possibly indicate how events will turn out this fiscal year.”

In situations like this, banks typically minimize their investments and lending. At the same time, it might be daunting for consumers to obtain home equity loans. Although it is unclear how consumers utilize their home equity loans, over 75% of Algarve residents term repairs and improvements as “good uses.”

A Foreseeable Recovery

For real estate facilities, there are concerns about the consumer’s ability to meet their repayment obligations once the Government suspends frozen loan payments. Under normal borrowing circumstances, the failure to meet loan repayment could invoke the lender’s right to recover the entire outstanding debt.

Given the uncertainties post the frozen loan repayments, the logistic and legal hurdles will render it almost impossible for banks to exercise their recovery efforts. With over 16% of total loans suspended, it will be impossible for banks to ignore the challenges further exacerbated by the pandemic. Economic recovery, however, relies heavily on policymakers to adopt the final phase of economic recovery.