Mortgages in Portugal: 5 Pitfalls to Avoid Before Making a Commitment

Many are often surprised when arriving in Portugal: the rules for obtaining a mortgage have their own specific characteristics. To help you buy property in Portugal and secure the best loan conditions, I’ll cover 5 pitfalls to avoid before making a commitment.

Pitfall #1: Proceeding Without Understanding Portuguese Mortgage Requirements

Before granting a mortgage, Portuguese banks evaluate several criteria related to your situation and project. Here are some key points to maximize your chances:

Debt-to-Income Ratio (taxa de esforço): Maximum 35%

In Portugal, it is recommended that your mortgage payments do not exceed 35% of your income. This debt capacity includes all loan payments and rent if you are a tenant. A high debt ratio can influence loan conditions. Banks may request additional guarantees or reject your application if the debt level is deemed too high.

Important Note

In 2018, Portuguese regulations (Banco de Portugal Notice No. 3/2021) introduced recommendations to limit household debt. Banks are now encouraged to follow strict criteria (particularly the debt ratio) to limit over-indebtedness situations.

Down Payment (entrada): 10% to 15% of Property Value

Portuguese banks typically require a down payment of approximately 10% to 15% of the property price. However, this depends on the mortgage appraisal (which I’ll discuss below). Your profile can also influence the bank’s requirements in this regard.

Age: Maximum 75 Years at Loan End

The age limit for obtaining a mortgage in Portugal is often set at 75 years at the end of the loan. If you’re young, you may be eligible for longer loan terms (up to 40 years). While borrowing over a longer period might cost more in the long term, you’ll benefit from lower monthly payments. If you’re older, the available terms will necessarily be shorter.

Stable Professional Situation

To borrow in Portugal, you must demonstrate professional stability. Banks favor borrowers with permanent employment contracts. Self-employed individuals or those with fixed-term contracts may face more challenges or need to provide additional guarantees. It’s important to note that your length of employment is an asset in the eyes of banks.

Credit History: Must Be Impeccable

Banks verify your credit history to ensure you have a good profile and financial behavior. A credit history without payment incidents is a crucial criterion for obtaining a loan in Portugal. If you have any outstanding debts in Portugal, banks are unlikely to grant you a loan.

Property Value: Financing up to 90% Possible

The property value is determined by an independent appraisal and is separate from the sale price (which I’ll discuss shortly). Banks typically lend up to 90% of the property value or purchase price, taking the lower of the two values.

💡Can You Borrow Without a Down Payment in Portugal? It is rare for Portuguese banks to grant a 100% mortgage, meaning without a down payment. However, it’s possible if you’re purchasing a property owned by the bank.

Pitfall #2: Trying to Avoid Portuguese Banks at All Costs

Many believe that loan costs will be lower through a bank from their home country or at least a French-Portuguese bank. However, this isn’t always true. You should abandon your preconceptions. Portuguese bank rates are not necessarily higher than in your country of origin. Indeed, rates are indexed to a European benchmark (Euribor) which French banks also use. You only need to find the bank that applies the lowest margin.

Pitfall #3: Not Following the Special Steps for Borrowing in Portugal

Obtaining a mortgage in Portugal requires following a 5-step process:

• Step 1: Initial simulation
• Step 2: Market offer comparison
• Step 3: Pre-approval
• Step 4: Property appraisal
• Step 5: Final loan approval

✅ Be aware that each step has its specificities (sometimes surprising when coming from abroad). Nothing complicated, but it’s important to understand them. Let me explain each step.

Step 1: Conducting an Initial Loan Simulation to Evaluate Possibilities

If you’ve found a property you like in Portugal, or if you want to know what type of property you can afford, it’s important to conduct an initial simulation. There are numerous mortgage calculators online – simply search for “simulador credito habitação.” Regardless of the simulator, it’s essentially a simple financial calculator at this stage.

💡At this stage, here’s what you need to know to ensure you’re heading in the right direction:

• The loan payment should not exceed 35% of your income
• You must provide at least 10% of the property price from your savings, sometimes more
• You should budget approximately 8,000€ in other fees for a property worth 100,000€
• The chosen loan term must consider your age at the end of the loan. For example, if you’re 50, you cannot spread your loan over 30 years

In any case, I recommend working with a mortgage broker who understands Portuguese mortgage specificities to eliminate your doubts.

✅ At the end of this first step, you already have an “unofficial” idea of the amount you can borrow in Portugal.

Step 2: Bank Pre-Approval (or Assessment of Your Borrowing Capacity in Portugal)

Understanding Bank Pre-Approval To obtain a loan approval and purchase your property in Portugal, you must first complete the bank pre-approval stage. In Portugal, there’s a particular aspect to note: the bank’s assessment following pre-approval doesn’t always result in a loan approval.

Unlike the final agreement, this bank pre-approval is tied to the evaluation of your borrower profile rather than the loan itself. Nevertheless, it’s important to retain the supporting documentation, as you can present it to the real estate agent or property owner to reserve the property that interests you.

At this stage, the bank thoroughly examines your profile: personal situation, financial status, professional background, and banking history. To maximize your chances, your record should be impeccable (at least for the previous 3 months). In other words, avoid showing overdrafts, bank charges, or worse, administrative seizure procedures.

Information Required for Pre-Approval During this initial simulation, the bank will request the following information:

• Property value
• Desired interest rate type (fixed, variable, or mixed)
• Financing amount
• Amount of your personal contribution

If you work with a broker, they can provide an initial simulation and conduct a preliminary analysis to submit to the bank.

Documents Required for Loan Pre-Approval To request a bank assessment, you must provide:

• Identification document
• Latest tax return (Portuguese or foreign)
• Employment contract, employer declaration, or business declaration for self-employed individuals
• Recent pay slips
• Bank statements (last 3 months)

Debt-to-Income Ratio Calculation (taxa de esforço) Using the information provided at this stage, the bank will briefly evaluate your financial situation. They will calculate an “effort” rate, which allows your contact person to determine the maximum amount you can borrow in Portugal, considering your situation.

Benefits of Loan Pre-Approval:

1. Provides an idea of what you can borrow in Portugal
2. Prevents losing a desirable property
3. Facilitates the final loan approval process

Timeline for Obtaining a Mortgage Pre-Approval in Portugal Depending on the banking institution, this initial assessment can take between a few days and one month. If you work with a broker, the process can be accelerated as they communicate with banks through professional channels.

The subsequent borrowing process only begins if you obtain bank pre-approval. At this stage, you’re not yet committed to purchasing the property. However, ideally, you should ensure the real estate agent or owner reserves the property for you: presenting the bank’s pre-approval can help with this.

Continuing with the translation, maintaining a clear, professional tone:

Step 4: Mortgage Appraisal in Portugal (avaliação bancária)

Mortgage Appraisal: A Mandatory Step for Borrowing In Portugal, having the property you’re purchasing appraised is mandatory for obtaining a loan. This appraisal enables the bank to determine the loan amount they will grant you (approximately 90% of the lower amount between the mortgage appraisal value and the purchase price).

This appraisal therefore serves to define which amount the bank will use to calculate the 90% they can lend you: either the appraisal value or the actual purchase price.

Important: The mortgage appraisal is not conducted by a standard real estate agency, but by an expert technician registered in the official registry supervised by the Bank of Portugal.

To provide the most accurate appraisal possible, the expert must complete the following tasks:

• Take photographs of the property (interior and exterior)
• Measure all rooms
• Precisely evaluate the state of preservation
• Consider the specificities of the property’s location

Mortgage Appraisal Cost This appraisal is not free. Most often, it remains the buyer’s responsibility. However, sometimes a seller may agree to pay for the expertise. The price of the mortgage appraisal depends on the property’s size: the larger the dwelling, the more expensive the appraisal. For example, for a two or three-bedroom property, the expertise price can range between €200 and €350.

Different Purchase and Appraisal Values: Impact on Your Loan This is another important consideration to understand. If the property’s purchase value differs from the appraisal value, it can affect your loan amount. Generally, Portuguese banks follow a prudent rule when determining mortgage amounts. They take the lower value between the purchase price and the appraisal value to determine the loan amount (and apply the approximately 90% rule).

For example:

• If a property’s purchase price is €300,000, but the bank appraisal values it at €280,000, the bank bases the loan on €280,000. As the bank lends 90% of the lower value, in this case €252,000, you must provide a personal contribution of at least €48,000 (excluding additional fees).
• If the purchase price is €300,000 and the appraisal is €320,000, the bank will base calculations on €300,000, the price you’ll actually pay. Following the 90% rule, you can borrow up to €270,000 and complete with a personal contribution of €30,000 (excluding additional fees).

In summary, if the appraisal value is lower than the seller’s price, you may need to provide a higher personal contribution to cover the difference. If the appraisal value is higher, it won’t impact the loan amount or required personal contribution.

Continuing with the professional translation, maintaining clear structure and formal tone:

Step 5: Final Mortgage Approval

Once the mortgage appraisal is completed, your loan undergoes a second review. This time, the objective is to obtain final approval, known as “Carta de aprovação” in Portugal, equivalent to loan offers.

The definitive loan offers include the following details:

• Approved loan amount
• Repayment conditions (duration, rate, monthly payments)
• Offer validity period (note that you are not committed at this stage)
• Official bank guarantee for the specified amount

The law provides a mandatory seven-day reflection period. During this time, the offer remains valid, and no penalty can be imposed if you decide to decline it.

The loan disbursement typically occurs just before signing the deed of sale (escritura), which is the final formality when purchasing property in Portugal. The loan amount is transferred either directly to the seller or to a designated transaction account (often an escrow account), depending on the arrangements specified in the contract.

First Loan Payment Timing

The first loan payment typically occurs one month after funds are released. The exact date is established when signing the loan contract and depends on when the funds were disbursed. In some cases, you may benefit from a payment deferral, which is common practice, particularly if you plan renovations for the property.

Pitfall #4: Choosing the Wrong Type of Interest Rate

In Portugal, different types of mortgages are available, specifically regarding interest rates:

Fixed Rate (taxa fixa)

A fixed interest rate remains the same throughout the loan duration. This means monthly payments will always be identical, regardless of market rate fluctuations.

Advantages:

• Predictable monthly payments
• Protection against interest rate increases, especially if market rates rise

Disadvantages:

• Fixed rates are often higher than variable rates at the loan’s start
• No benefit from rate decreases if market conditions become more favorable

Continuing with the professional translation in a structured format:

Variable Rate (taxa variável)

The variable interest rate is adjusted periodically (typically every 3, 6, or 12 months) based on reference indices (often Euribor). Monthly payments can therefore increase or decrease depending on these indices’ evolution.

Advantages:

• Monthly payments may decrease if interest rates fall
• Variable rates are often lower than fixed rates initially

Disadvantages:

• Monthly payment amounts can increase unpredictably, potentially creating financial difficulties
• If rates increase, the total loan cost may exceed that of a fixed-rate loan

Mixed Rate (taxa mista)

A mixed rate combines the two previous rate types. The loan begins with a fixed rate for a predetermined period (for example, 5 or 10 years), then switches to a variable rate for the remaining loan duration.

Advantages:

• Benefit from fixed-rate security initially, then transition to variable rate when interest portion of repayment is lower
• Potential for lower monthly payments if interest rates are low during the variable period

Disadvantages:

• Must be prepared to manage rate changes and uncertainty during the variable period
• If rates increase during the variable period, you might pay more than with an initial fixed rate

Capped Rate (taxa capada)

The capped rate offers a reasonable compromise. The interest rate can vary (thus affecting payments) but within a specific ceiling. For example, if your bank offers a rate capped at plus or minus 2 points, your rate cannot increase or decrease beyond this limit.

Advantages:

• Benefit from rate decreases while being protected against excessive increases
• Capped rates are often slightly lower than fixed rates, therefore somewhat less expensive

Disadvantages:

• Capped-rate loans may have slightly higher initial interest rates than variable rates
• In case of a significant decrease (unlikely in the current context, but possible over 30 years), you may miss out on savings, though refinancing might be possible

Pitfall #5: Ignoring Associated Mortgage Costs in Portugal

Property Purchase Costs:

• Purchase tax (IMT): varies between 5% and 8% depending on amount and type of purchase (primary residence or not)
• Notary fees (registration fees): generally between €500 and €1,500 depending on the transaction
• Attorney fees: common in Portugal for transaction security, typically between €1,000 and €3,000 depending on circumstances
• Appraisal fees: mandatory for mortgage applications, ranging from €200 to €500
• Processing fees: bank charges for loan arrangement, typically between €500 and €1,000 depending on the bank

Required Insurance for Portuguese Mortgages: You must obtain two types of insurance when taking out a mortgage in Portugal: life insurance and home insurance.

Life insurance is equivalent to death and disability protects your family and secures the bank in case of death or serious disability. It covers the remaining loan amount and prevents your relatives from inheriting the debt. The cost depends on several factors, including your age, health status, and loan amount.

The bank also requires you to obtain home insurance to protect your property against various risks such as fire, floods, or theft. The cost varies based on property value and selected coverage options.