The Ultimate Guide to Portuguese Mortgages For Non Residents

Before making the decision to invest in property in Portugal, it’s worth pausing to consider what is probably the most important question there is: is right now a good time to be buying in Portugal? As with all things, there are good and bad times to buy – something certainly true in property markets where prices can go up and down and mortgage rates fall somewhere between attractive and horrendous. 

Good news: there has arguably never been a better time to get a mortgage in Portugal. Rates are currently just above their all-time lows – and that’s for a number of reasons. The 10-year Portuguese government bond yield, which gives a view on how much the government in Portugal pays to borrow money over 10 years, fell in the summer of 2019 to its lowest ever level and now stands at 3.33% after an increase in 2022.

Even though the rates are rising rapidly, they are reaching a level that was considered a normality before the all-time historic low level we witnessed for a couple of years. They are still quite low and more importantly fixed for the whole duration.

There are two main reasons why so many people are using Portuguese mortgages for their property purchases in Portugal, even in some cases when they could buy outright in cash:

Portugal is one of the safest countries in the world and one of the most popular destinations for retirement. The main reason for this is its varied mix of geography. From the warm beaches of the Algarve and effervescent cities in the south, to mountains in the east, Porto in the north, Lisbon near the middle and a dramatic mix of landscapes in between.

This means that one person’s reasons for buying in a certain location can be very different from the next.

One of the main ways Portuguese mortgages differ to those in the UK is that you can fix the rates for such long periods; normally from 15-25 years. This means that with the current low rates, non-resident buyers can secure amazing long-term value through their mortgage in Portugal.

As with many aspects of life, the Portuguese and latin cultures do things differently. Nowhere is this more evident than in the lending sector. If you’re familiar with British banks, you’ll know that they tend only to offer fixed terms of 10 years or less. Portuguese banks, however, offer long-term rates that are fixed for the entire term of the mortgage. This means the financial system and property market benefit from stability and security over the long term. 

The deals are not only available to domestic buyers: international buyers can secure low-rate, long-term fixed mortgages over 15-25 years as well. This means that buyers know in advance exactly what their mortgage will cost – right up until the day that the mortgage is paid off. This offers the buyer peace of mind and a great deal of financial foresight – something equally true for the banks providing these products.

All of this helps explain why the Portuguese property market wasn’t as affected as it might have been during the downturn. It is also why the country is attractive to investors as a stable destination to place money for long-term growth: Portugal’s property market has boomed in the last few years.

A brief economics lesson: ever since the Nineties, when interest rates were last extremely high, the Portuguese mortgage market has been centred around long-term mortgage deals which offer a certain level of protection for the borrower. It is not uncommon for a Portuguese resident to fix their mortgage payments for 20 years and to stay with that loan through to its end without ever remortgaging. Alongside this, non-residents are also utilising this great long-term value for second home mortgages in Portugal.

There are, of course, some important things to consider. Only in very rare cases will Portuguese banks allow borrowers to commit to a mortgage payment which would increase their total monthly commitments past 45% of net income. By sticking quite rigidly to this formula, borrowers should be left with sufficient income to live on, and the fact that mortgages are either capped or fixed means that the banks have a certain level of confidence that their lenders will not default.

This kind of responsible lending brings has resulted in market stability, which is good news for the borrower (non-residents included) as 75% loan-to-value is still achievable from various banks – though other lending criteria may apply (the banks, may for example, only make loans available to existing homeowners or people with a certain level of savings. In addition, minimum income criteria also often need to be factored in).

This is how the mortgage works in simple terms: the bank will take a charge (which is basically a guarantee) on the prospective property – the loan offer will detail this. As for the mechanics of the loan, it will usually be what’s known as a ‘recourse loan’ – which means that in case of default the bank will take ownership of the property. If a forced sale results in negative equity, it’s possible that the bank may choose to pursue the borrower’s assets in their home country. The process of forcing a sale in Portugal is not an easy/straightforward one: it can take more than two years and is expensive for the lender. All of this explains, perhaps, why the banks are so inflexible when asking for evidence of a client’s income and assets.

Next: the $64,000 question! It’s the one that everyone wants to know when they start dreaming of property in Portugal: “Just how much can I borrow?”

Once people have started thinking about buying property in Portugal, thoughts turn to how much banks might be prepared to lend them. Even when you have sufficient cash in the bank to buy a property outright, mortgages can still make a lot of sense – for reasons we’ll explain in this guide.

The best first step when contemplating mortgages in Portugal is to read this guide – and then to speak with a professional mortgage broker for Portugal who will ask a few key (but painless!) questions to help establish your eligibility with a selection of different banks.

Each bank in Portugal has different underwriting criteria and a different range of products, so having a broker cast an eye over your situation will quickly help you to get a handle on your options. Banks in Portugal are famous for saying yes to everything at the beginning of the process only to change their minds at the last minute, leaving would-be borrowers seeing red as their purchase deadline approaches. 

We hear of quite a few cases coming unglued at the end like this, so we aim to lower the risk of wasted time/money by applying the ever-evolving banks’ criteria in advance. This way, we can inform clients of the most appropriate offers, based on our understanding and knowledge of the current market conditions. Please note that as brokers, we do not carry out UK credit checks, but we are still able to give a decision in principle. Portuguese banks may carry out a credit check in the UK once they receive a client’s mortgage application form.

To give you an idea of where you stand when thinking about a Portuguese mortgage, you can usually borrow five times your individual or combined (spouses/ partners) income for a repayment mortgage – less the value of your existing mortgage balances.

With interest-only mortgages, this rises to 10 times your income, less outstanding mortgage balances. This might sound pretty incredible, but there’s a big caveat: to obtain an interest-only mortgage in Portugal, you must have net assets outside of your main residence which at least equal the value of the mortgage. Note also that interest-only mortgages are currently only really available through private banks – who will require somewhere in the region of 50% of the loan amount in cash assets under management – i.e. they’ll want you to place the equivalent of around half of the amount they lend you (from your own savings/investment portfolio) under their management to invest on your behalf.

Of course, each buyer’s application is looked at individually to see what they could potentially afford to borrow – and there are variations depending on mortgage payments and how income is considered. Whilst the above is a good rule of thumb, it is worth contacting us for a free consultation. A quick chat can sometimes save people countless wasted hours.

Now might be a good time to tap your numbers into our Portuguese mortgage calculator so that you can see how much you can afford to borrow in Portugal. It works by calculating your debt-to-income ratio. 

With the harmonisation of many of the banking regulations after the 2016 Mortgage Credit Directive, most European banks now offer mortgages based on what’s known as an ‘affordability calculation’. This first looks at what borrowers are spending each month on things like personal loans, car loans, mortgage payments, rent and alimony.

Some like to call these fixed outgoings ‘committed expenditure’. Things like loan payments have to be paid (unless the loan is cleared), as has rent – unless you move. Insurance payments, school fees and media payments do not count, as these can in theory be cancelled.

The banks then establish your income. Usually this is gross income, but many banks only look at the net income found on pay slips, tax returns and confirmation from accountants and employers. 

When the bank is confident it has a clear idea of your income and outgoings, it can subtract one from the other and see how much you have left. This helps them to make the affordability calculation.

Calculation

If your income is 5k per month net and committed expenditure is 2.5K per month, then the debt-to-income ratio is 50%.

Banks in Portugal like this ratio to be 30 to 40% (the lower the ratio the more attractive you are to a bank): don’t forget that the committed expenditure must include the new mortgage payment. Banks will only entertain a ratio greater than 50% in extremely rare cases and when a client’s income is especially high.

A borrower’s ballpark figure:

• For a repayment mortgage over 20 years, for every 100,000€ borrowed, it will cost around €500 per month.
• For an interest–only mortgage, for every 100,000€ borrowed, it costs around €250 a month.

How rental income from other properties is factored into the debt ratio in Portugal

80% of the rental income associated with your existing property investments is taken into consideration when calculating affordability. Sometimes this rental income is deducted from the mortgage payment – which is advantageous to the borrower. However, more conservative lenders may simply take existing rental income and add this to the borrower’s main income. The maths at play here effectively mean that only 25% of the rental income is being taken into account when calculating the debt ratio (confused? Just ask us!).

What is the effect on the debt ratio and mortgage conditions if I want to rent out my new Portuguese property purchase?

In Anglo Saxon markets, the notion of a buy-to-let property being a standalone investment is rapidly losing steam. These markets are moving closer to the continental model where there is no distinction between the investment and the borrower’s personal income situation.

The positive takeaway here is that all Portuguese mortgages taken out with a retail bank work both for second homes and rental properties. 

The downside, however, is that in most cases the rental income from the new property in Portugal will probably not be taken into consideration when working out affordability. Because of this, banks will look at a client’s complete financial situation before they make a decision on whether to lend. As the banks are risk-averse and take the view that any number of things could get in the way of your anticipated rental income, any projected income from the newly-purchased property is basically ignored.

We’ve had a number of calls from people with an interest in purchasing a commercial property in Portugal. Unfortunately, properties of this type are not financeable by the average, everyday Portuguese bank – because they are considered to be commercial activity. Which means they require a professional loan for businesses. The only exception is if there is a clear plan to convert the property – or it is not readily apparent that the property is commercial. We can go into more details about this over the phone if you want to understand the nuances.

Income which can be considered by Portuguese banks is as follows. Please note that it is always best if you have clear evidence of everything on a tax return.

– Salaried income

– Dividends (with a three-year track record)

– Other regular income from investments

– Pension income

– Income from partnerships

– Rental income from existing properties with tenancy agreement

There’s no definitive list, but these typically include: payments for loans including personal and car loans, credit cards (unless you can clearly show that this is cleared each month), mortgages, rent, alimony, hire purchase, insurance policies. Banks in Portugal do not usually take school fees into consideration when working out the debt ratio. Good news for parents with a brace of kids at Harrow!

As a broker, we don’t carry out any credit checks. A couple of the Portuguese banks sometimes run an Experian check on borrowers once they receive a signed mortgage application, but in the majority of cases there is no credit check in Portugal. Instead, the bank will busy itself with a forensic check on applicants’ income via tax returns, bank statements, pay slips, employers’ letters, rental agreements, mortgage statements etc.

In Portugal, most banks like to do things by the book – there is little room for conversation with the client (and even less appetite for convoluted explanations): all they want to see are the documents they need that will help them to nudge the application up through the approval process. As they are interested only in the status of you and your finances, we often call this ‘status-only lending’.

This approach differs greatly from private banks, who can take more of a holistic view when considering your needs. If the purchase is over €1M, then the flexibility of a private bank which lends for property purchases in Portugal may be an attractive option (more on this later).

The traditional Portuguese mortgage products from the 1980s were 15-year repayment mortgages up to 70% of the purchase price. Nowadays, a 20-year term is more common, and banks are even willing to provide a loan of 100% of the purchase price on the understanding that instead of paying the 30% into the property, the money will be placed in a savings account with the Portuguese bank. This pushes things into the domain of private banking, an area that many of our high-earning clients are often keen to explore as it can unlock access to even lower interest rates.

The way these savings are managed varies from bank to bank. We always think it’s a good idea for clients to liaise with a financial advisor in their home jurisdiction who can help with any decisions on how to invest this money.

Indeed it does. The monthly repayment amount of your mortgage (or any of your existing mortgages) is a key consideration for Portuguese banks and will influence how they will lend.

The two main factors that influence this (beyond, of course, the size of the loan) are the duration of the mortgage and whether or not the loan has been set up on a repayment basis. The shorter the duration, the higher the monthly cost. The lowest monthly cost will be a mortgage undertaken on a part interest-only or full interest-only basis. Interest-only mortgages in Portugal are pretty rare, though, and as has been previously stated, will usually require a savings account to be opened with the bank.

Below is a table of the approximate cost per 100k borrowed that we refer to when doing a preliminary mortgage affordability calculation

Cost per month per 100k borrowed

– 10 years repayment product          925 per month

– 15 years repayment product          650 per month

– 20 years repayment product         500 per month

– 25 year repayment product           425 per month

– Interest-only mortgage product    250 per month

Of course, these costs fluctuate according to the rate environment when the mortgage is secured – and also if we have to consider payments that may need to be included in the mortgage as part of a life insurance contract. However, this is a good ‘rule of thumb’ table as it doesn’t tend to vary very much and is close enough for estimation purposes.

Portuguese banks – whose clientele is, naturally, mostly Portuguese citizens – usually nudge their customers towards repayment mortgages when they are buying properties which are intended as the buyer’s main residence. Interest-only options (if they are available) are normally reserved for investment properties. 

In the UK main residences are considered as assets, but in Portugal they are usually seen more as ‘a place to live’. Because of this, the country’s banks view a repayment mortgage on the main residence as a way to ensure that the debt will be repaid over time by the customer (assuming they keep up with the monthly payments – which they are inclined to do so that they can keep the property they live in).

When it comes to interest-only mortgages, the capital has to be paid at the end – and the banks feel that this represents more risk. In the minds of the Portuguese banks, if you want to speculate, then you should do it with a property that you don’t actually live in.

Considering that the property market in Portugal is something of a long-term hold due to a history of fluctuating property price growth since 2000 and the availability of 20-year fixed-rate mortgages on a repayment basis, many people are more than happy to opt for a repayment mortgage over an interest-only one. Certainly, there is a market for interest-only mortgages – especially among those expecting a windfall in the near future, who anticipate that the funds to pay off the mortgage will soon become available.

A repayment mortgage comes with a certainty of being paid off at the end of the term, whereas an interest-only mortgage will still have the full balance left to pay at the end of the term. As well as this, interest-only mortgages are notoriously difficult to refinance – although that is less the case if a private banking solution is sought. When in doubt, experience has taught us to suggest that people take a repayment mortgage.

Before deciding whether to offer a loan or not, some banks look at the assets a client holds. Many of them will apply a net asset criteria in order for clients to access certain LTV rates and products. A good example of this is an interest-only loan, for which some banks may expect to see a net asset position of 120% of the loan amount.

In other words, if you wanted to borrow €100,000 against a property costing at €100,000 on an interest-only basis, you would need to have €120,000 in net assets.

Net assets are calculated by taking existing asset values – things like property owned, share or bond portfolios and money in non-pension savings accounts – and then deducting all outstanding loan amounts. If the eventual amount is more than 120% of the required loan amount, then the bank should usually be happy to make the loan – though income criteria will still apply.

Other banks, however, may require a client to be an existing homeowner before agreeing to offer them a mortgage, or that they hold 30% of the purchase price in cash before accepting them as a client.

Whatever the approach, you need to have enough savings put aside to meet the necessary deposit and the fees – and also to demonstrate that you have enough savings left after the purchase for the proverbial ‘rainy day’.

A quick word here about the attitude of banks in Portugal. It would be unfair to lump them all together, but there are definitely some patterns. Whether we are dealing with a major national name or a single small branch banker, they will almost always be extremely fastidious when things get to the credit committee level. It is unusual to be able to skip any part of the application process or to substitute any of the documents that they have asked for for something else.

The banks’ basic attitude is that they have enough people ready to snap up the ‘vanilla’ offering they have – so why waste their time and effort on anything non-standard? Of course, a broker will have some skill and experience in presenting applications to the bank in ways which perhaps deviate from the norm a little yet will still be acceptable to them. So our recommendation for applications in Portugal (and elsewhere) is, quite simply,… always use a broker!

Each bank in Portugal will also have an ‘age ceiling’ which will very much affect the amount you can borrow. The maximum age that we are aware of allows loans to be completed at the age of 75.

The effect of this can be that, for some borrowers, the duration of the loan may need to be somewhat shorter than they would have liked – and the mortgage payments would go up accordingly. This has further implications: in many cases, the maximum amount of money that the banks will lend you will have to be reduced – because they will still insist that you comply with their debt-to-income criteria.

Banks tend to take a very close look at a client’s income situation if it is likely that they will enter retirement during the loan term. This can mean that either the retirement situation is documented clearly and they calculate things accordingly, or a simple “haircut” of 40% may be given to the current income situation (i.e. they will knock 40% off your current earnings for those years when you will be in retirement). And yes, this will also affect the eventual debt ratio.

When looking at joint applications, the banks will take the age of the older borrower into consideration when deciding what the maximum duration would be. There is an exception, and that is when the income from the older borrower is not being taken into consideration. Age is also a factor that banks will contemplate when setting the amount that will usually have to be paid for life insurance to cover the loan. We’ll delve into this further later on.

First stop: take a look at our terms of business here. Our service as brokers is usually remunerated at around 1% of the loan amount. This reflects the value that we add in helping clients find a great deal for them – it also reflects the network of contacts we have built up over the years, plus the costs of maintaining that network. We can usually save our clients money over the duration of the loan by accessing lower rates – and we can also help make the experience of getting the mortgage as easy as possible. This is highly appealing to many clients given the difficulties of conducting work across cultures and borders.

In some cases, the bank will pay this fee to us – which actually makes our service free to use for our clients. If there’s a likelihood of this happening we will of course let you know, but please don’t count on the bank covering the fee, as in many cases it is charged to the client directly.

In every case, a full range of options will be presented to you during our initial conversations, and all fees and taxes will be clearly explained. No one wants any budgeting surprises!

The affordability calculation doesn’t alter when it comes to equity release or refinance mortgages. Please note, though, that it is actually rather difficult to release equity from properties in Portugal – unless you are dealing with a private bank (more later).

For refinance loans, Portugal – like much of Europe – has a curious policy of not being very amenable to extending the duration of the loan by much. When pushed, they might stretch to an additional 25% or so – at the most. So if, for example, a loan with a 20-year initial rate has 10 years left on it, then the bank would probably not want to extend the term by more than 2.5 further years (for a total of 12.5 years). This means that when refinancing, the actual monthly cost would not decrease as much as you might expect because the duration cannot be extended by much.

In addition, the actual costs to refinance (nothing is ever free!), including the mortgage registration tax and any early repayment charges, are usually in the region of 2-5%, meaning that the new rate you are securing needs to be at least 0.5% lower than your current rate for this to be even slightly appealing.

The maths, generally, are just not on your side here – so the best plan of action would typically be to get a mortgage and then hang on to it until it’s all paid off.

Next: a quick look at the various (OK, many!) steps involved when buying a property in Portugal – covering everything from getting a mortgage agreement in principle to life insurance obligations, completion and more.

The process of getting a mortgage in Portugal should probably begin with a deep breath (or, better still, a nice relaxing massage), because there are some practices and customs employed by the Portuguese banks that will feel very unfamiliar indeed…

Even with the many years of experience that the members of the PPF team have amassed, we are still left stunned from time to time by some seemingly bizarre requests from lenders.

Because banks do like to throw us the odd curveball, we’re big fans of telling would-be buyers to begin the process early, speaking with a broker and completing an application form so that a plan can be drawn up that will cover all aspects of the mortgage. To give you a head-start – it’s also worth reading the section on how to calculate your affordability for a Portuguese mortgage.

We strongly recommend checking your affordability as early as possible, because this will help you start looking at the right properties. Knowing what you can afford also means that we can start narrowing down the right banks for you as quickly as we can.

Underwriting criteria:

It’s important to understand that each of the Portuguese banks will have slightly different underwriting criteria – and because of this they will require a slightly different set of supporting documents. Some banks may also insist that your documents be certified by a finance or legal professional.

Whatever they need, the banks will require a full set of documents to process your mortgage application – they tend to be pretty inflexible about what they want. We’ve listed everything you’ll need right here (below) and we advise you to make a start on gathering this vital collection of paperwork as soon as possible.

Your personal circumstances will be very important when considering how to finance your Portuguese property purchase. It is well worth looking at the options from the very start: the basic choice is buying it in your own name or via a company structure. Portuguese banks will lend to ‘Sociedade por quotas de responsabilidade limitada’ (a type of company vehicle in Portugal) if they are made up of close family members (for example, parents and/or children buying together, as well as siblings – but not cousins or friends). A discussion of some of the most pertinent tax implications can be found in the Portuguese tax section. 

Importantly, Portuguese banks do not lend to UK companies. Nor can a UK company be a shareholder for a La Sociedade por quotas de responsabilidade limitada set-up, according to our research.

Please note that the above information is for informational purposes and is merely just a starting point for discussions with qualified professionals. It should not be relied on without a full appreciation of your personal plan and circumstances.

The documents that are required when submitting a mortgage application are as follows:

Identity Details

– Certified copy of a passport for each of the borrowers

– Second proof of identity (ideally a birth certificate or a driving licence) for each of the borrowers

– A copy of the applicants’ marriage / divorce certificate (when relevant)

– A utility bill that is less than two months old (gas, electricity, water). A council tax bill is of no interest to Portuguese banks

Employment Details

If employed

– A headed letter from the employer specifying the applicant’s professional status, their length of service, gross annual income and details of any bonuses for the last three years

– Last 3 months’ payslips 

– Last 3 year’s P60s and tax returns

If self-employed

– Last 3 years of the business’ company accounts (showing profit and loss)

– Last 3 years’ tax returns 

– A letter from your accountant detailing your income for the past three years. This should include the applicant’s salary, dividends and any other income. It would be beneficial in the same letter to show confirmation of the company’s last three years’ turnover and net profit/loss. If the accountant could add a word or two about the financial stability of the company and its ability to continue to support your income from its activity, even better.

If Sociedade por quotas de responsabilidade limitada (company vehicle in Portugal):

– Registration certificate of the company extract less than 3 months old

– Status of La Sociedade por quotas de responsabilidade limitada or project of the status if the company is being set up

– Last 3 months’ bank statements 

– RIB / IBAN (account details)

Financial Details

– Last 3 months’ bank statement of all the applicant’s current accounts 

– Last 3 months’ bank statement of all the applicant’s savings accounts

– Copy of the most recent loan statement (or the original offer)

– The last 3 months’ statements of your credit card bill

– An email explaining any large, regular transactions

Property Details

Applicant’s existing main property 

– Signed tenancy agreement (if applicable)

– Title deed from land registry and copy of the most recent mortgage statement or the original mortgage offer

Other Investment property(ies)

– Title deed from the land registry and a copy of the most recent mortgage statement (or the original mortgage offer)

– A signed tenancy agreement (if rented out), plus any recent documents proving rental income – such as lease contract if there is no tenancy agreement

Property to finance

– The contact details of someone (at the estate agent or the property itself) for its valuation by the bank

– Copy of the contract of sale signed by both parties

– Copy of the reservation contract – signed by both parties

Situational

– Quotes for building work

– Works contracts

– The insurance certification details of each builder

– Architect’s contract

Portuguese mortgage products

 Mortgage products in Portugal are created to maximize security for the borrower, as this is what the market wants. Because of this, the majority of loans in the mortgage market will be on a long-term fixed rate or a capped rate.

Repayment mortgages

Repayment mortgages are more expensive than an interest-only mortgage because, of course, you have to pay the interest on the loan amount and also have to pay off a slice of the capital each month. With Portuguese mortgage rates so low at the moment, the long-term value can be significant, especially when compared to rates of some other European countries.

Repayment mortgages are often what’s known as ‘capital and interest’ mortgages, and on a €100,000 mortgage you may find yourself paying perhaps, €7,200 per year – almost double what you’d pay on an interest-only loan. Repayment mortgages are usually the best option for main residences, but they can also be of interest for investments, such as buy to lets, where the goal is to pay off the mortgage and/or enjoy the income. Repayment mortgages are easily the most common mortgages in Portugal and they also offer the most protection.

Interest-only mortgages in Portugal

When taking out an interest only mortgage, as the name suggests (and as you probably know) you only pay the interest on the amount that you borrow. If you borrow €100,000 at a 2.5% interest rate, then you will have to pay the bank €2,500 per year. After 20 years (and 50k of interest paid) you will still owe the bank €100,000 and have to either sell the property, or, alternatively, find the funds from elsewhere to pay back what you have borrowed. The idea is that the property you bought should have increased in value by then so you will have made a profit whilst keeping your costs down.

Interest-only mortgages are popular with investors who are hoping to make a return by selling the property for more than the purchase price.

Security

As most borrowers (and all lenders!) want security in their financial plans, a long-term fixed rate mortgage is our top product. It offers low rates for a long time, and this makes it safe from market risks.

Some clients, however, prefer a variable rate so that they can avoid early repayment charges – these people also tend to be of the opinion that the risk of rates suddenly increasing is low. Often, these borrowers are expecting an income boost or windfall in the near future that they will use to pay off the loan.

Little-known fact: there is a kind of ‘in-between’ product that offers some security (the rate is capped so the exposure is limited) while benefiting from the advantages of the variable rate: it’s known – you guessed it – as the capped variable option.

Fixed rates

The lion’s share of loans in Portugal utilise a fixed rate for the full term. Fixed rates are available over 10, 15, 20 and even 25 years. And yes, you are reading this correctly: the rate is completely fixed for the entire duration of the mortgage. This offers total certainty when it comes to the monthly repayment. 

Variable rates

The majority of variable mortgages are capped. This means that there is a maximum rate that the mortgage can reach (for a set duration).

The duration of some variable rate tracker loans are what’s known as ‘elastic’; they can stretch the mortgage term by up to five years if rates increase (and thus allow your mortgage payment to remain the same – even if rates increase by as much as 0.75%). Additionally, any increases to the mortgage payment are generally limited to the rate of inflation per year, meaning an overall increase to the amount you pay of 2-3% per year. Due to the current, low fixed rates, banks are now offering relatively few variable rate options.

Switching to a fixed rate

Protection is offered by law which states that if you take out a variable rate mortgage, you will always have the option to switch to a fixed rate for the rest of the term. Note, though, that if you make this switch, you may have a penalty to pay and you will not be able to switch back again to a variable rate mortgage. While these extra features offer a degree of peace of mind for prospective borrowers, they do vary from bank to bank. It all reinforces the point that it’s good to do your homework (and lean on your broker’s expertise) when you are comparing the various offers on the market.

The documentation will be received and reviewed by an underwriter who will check the affordability and review the documentation. He/she will raise questions and ask for further clarification or documentation.

Once that hurdle is cleared, the underwriter will send the application on to a risk committee and/or compliance committee depending on the bank. For a large loan, the application may pass through several more committees before approval.

Purchase through a company

If you are buying the property inside a company structure, you will have to provide the name of the company and perhaps the draft statutes at this stage. The loan can be approved with just the drafts but the mortgage offer will not be printed until the company has been finalised together with the bank account for the company, which may well require a trip to Portugal. So be prepared!

Once the mortgage rate has been secured, the requisite life insurance needs to be sorted out. This will involve the applicant completing a medical questionnaire and possibly undergoing some tests. and waiting for the results. Once the bank has all the details it needs, the rate of the insurance can be added to the mortgage contract.

Are you eligible for the insurance?

Unfortunately, age is an important consideration when setting life insurance rates. Younger applicants should be able to get cover with relatively low monthly payments. Older applicants – you can see where this is going – will pay more.

In some cases – such as when you have had any medical problems in the past, or you’re borrowing a significant amount of money – you may find that the life insurance company will ask you to undergo some medical tests.

Sadly, you may be refused life insurance altogether if you have had any serious medical problems. All is not lost, though, as it might be possible to arrange a loan without life insurance – or to assign UK cover. This will, however, greatly reduce your choice of Portuguese mortgage products. 

Opening a bank account in Portugal

This is a crucial part of obtaining your mortgage – you probably won’t be able to get the mortgage without a Portuguese bank account. You normally have to open one three or four weeks after you’ve begun the mortgage application process.

Whether you plan to live in Portugal or have a second home in the country it will all be easier – and is generally a condition of the loan – if you have a Portuguese bank account.

Opening the account

Opening a bank account in Portugal is actually pretty quick and simple (for an individual – as opposed to a company; more later). Firstly, you will need to fill in and sign the appropriate forms. They will, of course, be in Portuguese, but we can provide English translations of them so you can see what you are signing.

In addition to a completed (and signed) form, there are several other documents that will be required before you can open a bank account in Portugal:

– Copy of a valid passport

– Marriage certificate (copy)

– Copy of a recent utility bill that is less than three months old

– Proof of income (your tax document, accountant’s letter or last two payslips)

– The reservation contract/title of the property you’re hoping to buy in Portugal

Once these items have been provided to us, we can normally get a bank to open an account for you in 48 hours.

There’s a catch, though – almost all lenders will want to see you in person before opening the account, so it’s a good idea to have your suitcase packed.

Joint accounts

No real issues here: if you wish to open a joint bank account you have the option of the account being held as Mr. and Mrs. SMITH or Mr. or Mrs. SMITH. In the case of the former, both parties must sign when making any payments/withdrawals and in the event of one partner dying, the account will be frozen until the will has been proven. If you want a joint account where either partner can draw on the account, the second option is the one to go for. 

Banking hours

Bank opening hours in Portugal vary quite a lot, depending on the location and size of branch. Generally, though, they are open from 9am to 5pm Mondays to Fridays. Some banks open on Saturday mornings and stay open late on certain evenings, especially in larger towns. Expect your bank to close for lunch in smaller towns.

Opening a Portuguese bank account for a company

This is less straightforward than when opening a personal account, although things become a little easier if the bank providing the loan also opens the account. We always try to break things down as simply as we can for clients and make sure they understand all of their options.

Once the Portuguese account is open and life insurance in place, the bank will be ready to print the offer. They will send this to you by DHL or some other courier.

When this has been received, you will have to wait (a slightly infuriating) 11 days before you can sign and return it. There’s no getting around this cooling off period,  though some banks will let you return the offer the next day if the mortgage offer is in the name of a company. Not all banks do this: some feel that because clients are offering a kind of personal guarantee (the clients being the guarantors of the company), then the full 11 days should be waited.

While waiting, it’s a good time to either prepare a trip to Portugal to sign and complete the purchase – plus, of course, transfer your personal funds – or to arrange for a power of attorney to be completed so that the Notairio (the Portuguese legal representative who has to be engaged for all property sales) can sign on your behalf.

Power of attorney

Arranging a power of attorney is actually a pretty simple task, although there is a bit of admin work to do. The Notairio will arrange the paperwork once he/she has a copy of your mortgage offer. This document and the mortgage deed must be completed in front of a public Notary in the UK before being “apostilled” at the Foreign and Commonwealth office to ensure that the witnesses are who they say they are. There are (paid) services that can get all of this done for you – let us know if you’d like an introduction.

The minimum amount of time between the bank receiving the offer and then transferring the funds to the Notairio so that the purchase can complete is 2-3 days. It is not worth planning on this all taking less than a week, though, as delays are always possible.

The completion of the purchase takes place in the Notairio’s office – either with you there in person, or by the Notairio acting alone with the requisite power of attorney.

The Notairio will send a breakdown of all the funds which have to be transferred. This will include the “Notairio fees” – a catch-all term which breaks down as follows:

The IMT (or Property Transfer Tax), which depends on the purchase price and ranges from 2% to 8.8%. On average, it is about 6% of the purchase price and is payable regardless of whether you have a mortgage or not (even cash buyers have to pay it – though most buyers are eligible for certain reductions according to their circumstances).

The Notario’s  fees for conveyance of the property will vary and will have to be added.

Other mortgage-related fees 

Mortgage-related fees can include:

•   Mortgage administration tax – 1% of the mortgage amount
•   Bank survey and appraisal – about 500€
•   The arrangement fees for the banks vary from 1,000€ to 1.5% of the mortgage amount
•   The broker fees are 1% of the mortgage amount 

By taking out a mortgage in Portugal, you will also have to pay mortgage registration tax which varies depending on the loan amount, but as a rule of thumb will be 1%. This is included in the Notairo’s breakdown.

Portuguese banks will charge up to 1% as a fee to set up the loan, though generally the amount will be lower than this and not usually included in the breakdown as this is usually transferred directly by the buyer to the bank.

You will also incur fees with your new Portuguese bank account, which will have an annual fee of approximately €100. Portugal Private Finance charges a fee as specialists in securing and adding value to the mortgage process which will be payable on acceptance of your mortgage offer. Usually, the combination of bank and broker fees does not exceed 1% of the mortgage amount.

Once the purchase has been completed and you’ve treated yourself to a celebratory glass of Champagne (or port), thoughts will swiftly turn to the first mortgage payment. It won’t take you by surprise, though, as you’ll have set a date for this during the mortgage application. It is quite often the case that the bank fees connected to the application will be deducted from your account alongside the first mortgage payment.

Portuguese banks and laws are not particularly well set up to cater for the purchase of off-plan properties to non-residents. As is the case in neighbouring Spain, it is not possible for the transfer of title to take place before a property is actually built. 

It is possible for non-residents to take on their own property construction on a self-build basis. This will mean purchasing the land and arranging a construction contract with a third party.

While the property is being built, you can ask for a deferral period during which, depending on the bank, you will only have to make life insurance payments until the property is completed.

The amount of interest accrued during this deferral period is calculated pro rata on the sums drawn to cover the staged payments that are made during the construction. This means that you might not have to make full payments for the mortgage until you receive your very first rental income payment from the managing agent (assuming you are planning a buy-to-let investment). Other options during the construction period include paying the interest alone – or starting repayments immediately.

This, of course, is all quite technical and we’re happy to expand on any of the above if you need more information.

Next: a really important question for anyone looking to make a purchase in excess of a million euros who also has investments totalling at least that amount: should you go down the private banking route? We’ll explain why this can be an attractive option in certain cases.

Some of the things you think you know about private banking are true, but there may well be some things that you don’t know either. We cover the ins and outs of private banking in this section – but feel free to skip it if the price of your intended property purchase is less than a million euros (you’re in good company, don’t worry! The average price for our clients’ European property purchases is in the 500k-1m range).

A private bank is very different to a high street bank. It’s very often run by quite a small team, and is more of an investment proposition focused on growing the amount of money that it manages. It does this by offering concierge-like customer service and – hopefully – investment excellence.

A private bank will aim to manage its clients’ assets in order to generate returns and preserve capital. Unlike their retail banking counterparts, they do not engage in ‘faceless’ high-volume mortgage lending. Instead, they offer a more intimate relationship where they build trust with the client and take a holistic view of the client’s financial needs.

In some ways – because of this broad view that they take of the financial lives of their clients – private bankers also serve as a kind of ‘family office’, and can connect the client with relevant experts, depending on the project at hand.

They are seeking flexibility

Around half of Portuguese property buyers who use a private bank do so to take advantage of the greater flexibility they offer in terms of the underwriting criteria of the loan. A private bank’s ability to take a more bespoke view, instead of a more ‘one-size-fits-all’ approach more commonly seen at retail banks, means that mortgages and loans can often be obtained for clients with even the most complex financial situations. That said, the bank will almost always need certain assurances that a wider/deeper financial relationship with the client is likely to be forthcoming.

They are seeking to optimise their investment

Other people opt for a private bank because they want to make the most of their purchase from an investment point of view. In fact, it has been said that buying a property using a private bank is one of those rare occasions where you can have your cake, eat it – and then get slimmer!

Thanks to the special relationship that private banks have with their clients, the interest rates they can offer can be very low. These low rates, combined in some cases with not having to put down any deposit for the property (yes, properties can be 100% financed by the mortgage), means that any existing investments can be left untouched, helping to generate income that will help cover the interest on the loan… whilst at the same time allowing buyers to enjoy the benefits of property ownership*. There’s a bit more to all this, though, which we’ll get to in a moment.

* PPF does not offer advice about investments, nor do we make any warrants as to the suitability of any specific private banks. Our advice is simply to keep funds in cash to support the loan. Investment decisions are always made directly between the bank and the client.

Private banks, in simple terms, want to increase the size of the pot of assets that they have under their management. The bigger the funds they have to work with, the more successful they are seen, and because of this they are very interested in speaking with people with investable cash or assets (excluding property) of more than $30M. These are known as UHNWIs (ultra-high net worth individuals), though private banks are also interested in HNWIs who can place significant amounts of money under management. As the total number of HNWIs and UHNWIs around the world is hardly enormous, private banks will often start working with promising clients before they reach this lofty status, hoping that their expertise can help them get to the next level. 

When it comes to a property purchase, one of the main factors that private banks will take into consideration is the size of the deal (both the purchase price and also the mortgage that is required). They will have a particular focus on the assets that the bank will be looking after post-deal.

The second thing that is of great importance to the private bank is the ratio between the amount of assets and the loan that the client is hoping to take out. Banks across Europe are subject to the Basel 3 capital requirements which lay out in particular the Tier 1 capital ratio, which is explained further below:

– Core equity capital (cash, investments)

– Risk weighted assets (mortgages, liabilities)

In simple terms, private banks are not keen to enter into loan agreements which will decrease their ratio, i.e. they don’t want to add a mortgage or a liability to their books without first taking pledges over financial securities to offset this. For this reason, something called a Lombard loan can be very appealing: the higher the ratio of assets to loan you take, then the more flexibility there can be.

A Lombard loan is a loan that is secured (pledged by the bank) purely against liquid financial assets (as opposed to a mortgage loan secured against a real estate asset). In layman’s terms, you give the bank 100 to look after and they will lend you 100. As this approach adds up to very little risk for the bank, the interest rate on this type of loan can be extremely low. One of the main reasons people use Lombard loans is that it removes the need for a client’s portfolio to be liquidated to pay for the real estate. There are some other financial advantages, too: for example, interest can be offset against rental income in some cases. This is something, however, that always needs to be checked with a tax adviser.

There are two main options when looking to work with a private bank in Portugal. Blending the two concepts to find the best value can sometimes be a good idea, too.

Option one: Minimise the funds that are transferred to the bank

How? The private bank will take the property as collateral and give a lending value to it. 

In this scenario, PPF will aim to find a lender who will lend 100% of the sum required to purchase the property. We then look to see if we can minimise the amount of assets that the bank requires. 

Usually, the minimum they will want is 50% of the loan amount, although this can be reduced to 30% or sometimes even lower, depending on the deal. Generally speaking, if the private bank feels that there is strong potential to develop the asset management side of the relationship, they will be more flexible.

Option two: Minimise the interest costs

This is a private bank’s forte and is probably their favourite type of lending. In cases like this, the loan is fully collateralised with cash assets that are managed by and pledged to the private bank. The client places the property (for tax purposes only) as security – though, in reality, the property is not even required because this type of loan can be made without mention of a property at all. 

In a Lombard loan situation, a client would place assets with a lending value of 100% of the loan amount. If these were equities, their nominal or “face value” might actually be as much as 200% of the loan amount.

With the bank now feeling fully safe in its lending (and assuming that the loan does not affect its Tier 1 ratio for Basel 3), it is possible to access the keenest rates anywhere in the market. Private banks are in competition with each other for business, which is why PPF like to shop around for our clients to see which bank is prepared to offer the very best lending rates for the mortgage.

Typical rates will be a variable margin below 1%. On top of this there will be management costs – these are also likely to be less than 1%.

When someone is using a high street bank to finance a property purchase, they will come across the lending value of the property, which is typically established by a surveyor. Buyers are then usually offered a loan against this value, up to the maximum the bank will accept in terms of their loan to value (LTV) ratio. If a bank has a maximum LTV rate of 80%, they will lend €400,000 against a property valued at 500,000€.

Private banks use a similar method when they consider how they will lend against a portfolio of stocks, shares and bonds. They each have what’s known as a lending value ratio or LVR. The types of investments available affect this LVR: cash, unsurprisingly, is king. The less liquid the asset, the less weight it carries in the eyes of the private bank. A table showing how most investment types are weighted by private banks is laid out below.

These percentages illustrate the nominal value – also called the face value – of different types of asset: 100k of government bonds would have a ‘value’ of 90k in the eyes of the private bank, for example.

Private banks are happy to look at an entire portfolio that a client hopes to transfer to (or create with) the bank and can assign an LVR to each line. 

For example: a private bank wants 2,000,000 € of assets under management (the lending value). If the client wants a relationship with the bank and wants to put forward the management of a mutual fund – the LVR of which is 80% in the table above – the client would need to put forward a mutual fund worth 2,500,000€ (2,000,000 / 0.80). This is known as the nominal value. 

A key part for us when trying to find the optimal relationship for a client will be establishing the values each bank uses.

When dealing with a private bank for a property purchase, the fees are as follows:

Property valuation fee

Once you have settled on a bank, the property needs to be valued. You can pick a valuer from a panel of acceptable candidates agreed by the bank. Note: not all valuers will be accepted by the bank. Note also that the bank will want to instruct the valuer (and then kindly send you the invoice). Costs for this service vary from 2,000 to 7,000 euros depending on the property.

Bank fee

The private bank will charge the client a fee for the opening of an account and setting up the loan. These will vary from bank to bank and will likely be listed as ‘arrangement fees’ or ‘account opening fees’. Depending on the relationship the private banker has with the broker (such as PPF), some of these fees may be paid to the broker. We will let you know of any such arrangements as the deal progresses.

Broker’s fee

A fee will be charged by the broker that is appropriate to the work involved. This will reflect the amount of time and effort that has been made in finding the right bank to match the specific requirements of each client – and trying to ensure optimal conditions for the loan. Typically, the total combined bank and broker fees for opening the account and setting up the loan are somewhere between 1% and 1.5%.

As previously mentioned, a private bank is eager to increase the assets that they have under their management and to actively help clients handle their investments.

There are two main types of contract (also known as a mandate) that you can give the bank to help manage these investments:

Discretionary mandate 

In this case, you afford the bank the ability to buy and sell on your behalf whenever they deem appropriate. Options typically follow a conservative, balanced or aggressive investment approach, according to your agreed risk profile. A mandate of this type has an average cost of 1%.

Advisory mandate

This option means that the bank will offer advice and suggestions about when and what to buy and sell. It can either have an all-in, fixed cost – meaning you can trade as much as you like for, say, 1% – or it can be based on a lower ongoing charge, plus costs per trade.

Other charges

As well as the mandate fees, there may be other fees, such as yearly administration charges for reporting and the general management of accounts. On top of this will be a custody charge, which covers the holding of assets. The range here is normally 0.1% to 0.3%. In some cases, these custody and admin charges may be included in the mandate cost. The exact nature of the bank’s fee structure becomes more important if a client wants, for example, 50% of their portfolio in custody only as a long-term hold and the other 50% under management in a mandate.

We’re happy to explain his further if it’s all a little confusing (as most things to do with finance tend to become when dealing at a higher level).

Existing property

A private bank will usually assign a lending value ratio of between 50 and 65% of the valuation report price of the property. For existing properties, then, things are quite straightforward.

Off-plan and construction

Things become a little more complicated for off-plan properties. The majority of private banks are not comfortable lending on a property which hasn’t yet been built – or is under construction or undergoing major renovation work.

The reason they shy away from situations like this is that it can be difficult for the bank to establish the value of the property because of all the additional risks that construction brings.

In cases like this, most private banks will ask for additional collateral during construction – they will prefer a full Lombard loan that is secured purely against assets until the whole process (construction, survey, valuation, mortgage registration and LVR assigned) is completed. You can then switch to a mortgage loan against the property and reduce the amount of assets pledged to the bank.

As well as the above, there are a couple of options which do not require an initial Lombard loan and that allow construction to be financed up to 100% LTV, with 30% LVR in Assets Under Management. We can explain these if required.

When it comes to affordability for the loan, a private bank can be rather more flexible than a retail bank. So long as a client has sufficient assets, an experienced broker such as PPF can usually find a way for clients to meet lending criteria.

Next: you’ve found your dream property, you’ve had an offer accepted, you’ve filled in the mortgage application… and then the bank turns round and says, ‘No’. There are lots of reasons why Portuguese banks turn people down – and we’ve rounded up the most common ones to help people avoid disappointment.

Before embarking on the process of getting a mortgage in Portugal, it’s essential you have a comprehensive understanding of the things that might derail your application.

Many Portuguese mortgage applications breeze through, but there are things to avoid if you want everything to be plain sailing. In this section, we look at some of the most common obstacles – and explain the things you can do to get your finances in good order so that you can maximise your chances of success.

One of the most common reasons why Portiguese banks turn down an application is that the client has a tendency to run their accounts with a negative balance – i.e. they regularly use their overdraft. Banks can sometimes refuse even if there is ample proof of sufficient savings elsewhere to clear the balance. 

This might seem harsh, but it is mainly a cultural thing – the Portuguese simply don’t run their bank accounts like this and the banks themselves find it tricky to understand why a financially-secure person would use an overdraft. The ability to generate income and save it is a key driver of the banks’ credit mentality and so, as they see things, when someone regularly dips into their overdraft they must lack the ability to manage their money. Getting a Portuguese bank to change its mind after turning down an application is always a challenge.

Because there are no traditional credit checks in Portugal, underwriters will instead look at all income and outgoings until they are satisfied they have a clear picture of the applicant. That said, a few banks do now ask for a credit report from the UK as this can be a useful cross-check for the bank. All financial details that are requested from you will require documentary evidence – there really is not much desire on behalf of the banks to read between the lines. So income not being declared on a tax return, rental income being paid in cash, a lack of payslips or tax returns can cause real issues with an application.

In Portugal, your bank will be disinclined to take non-salaried income into consideration when there is not a three-year track record. This means that a bonus from a new job or first year company dividends are unlikely to cut the mustard in terms of being something a bank will lend against. There can also be a lot of head-scratching when someone has sold their company and now has a significant amount of investments which would generate enough income to support the loan (but lack a proven track record). Even though the assets appear rock-solid, a Portuguese retail bank will probably not be in a position to lend.

In cases of this nature, a private bank will be more flexible and would likely be interested in getting assets under management. See our private banking guide for further details.

Portuguese banks are very much open to the world – they are among the most receptive of all banks anywhere on Earth when it comes to overseas clients. Maybe it all harks back to the country’s history of travel and exploration; whatever the reason, Portuguese banks are essentially willing to lend to anyone from anywhere – providing the country is not on a black-list and the financial situation of the borrower is clear and can be substantiated with evidence.

What Portuguese banks are most interested in is the clarity and reliability of an applicant’s financial situation. So if you work for a big brand like Coca Cola, then no matter where you are based in the world it is quite likely we can find a loan. If you’re a self-employed European, getting a mortgage in Portugal shouldn’t be too hard, but self-employed people from outside of Europe often find the going pretty tough… unless their financial profile is crystal clear and perhaps audited by a global name. If tax returns are not available, then income needs to be corroborated by a listed company.

As we have already explained, a private bank can cut through some problems related to a questionable paper trail… but they will always require more than €500k to be placed with them (so that it can be managed/invested) and, in fact, usually more than €1M.

This all harks back to the banking industry’s drive for more responsible lending – and also a cultural focus on having enough savings. Releasing equity from your existing property so that you can finance a deposit for a Portuguese mortgage is a non-starter – unless it all happens well in advance (i.e. 4-5 months). The same is true for withdrawing funds from your company. While it is possible sometimes to draw an extra dividend to help with a mortgage, once again it is best to do this some time before it is actually needed – and to keep to the same pattern. Banks do like regularity!

Banks are pretty savvy, and have naturally adjusted their credit policy over the years according to how the default rates are looking. For a long time now they have recognised that if they allow someone to put every last penny they have into a property, then these people are quite likely to go on to miss a mortgage payment (or two). The rule, then, is to show some rainy day funds that are left over after the purchase. How much of a rainy day do you need to prepare for? Around 12 months’ payments or €20k is normally about right.

This might sound a little mercenary, but banks always look at the security of the property and also their ability to sell it on quickly if you default and they have to call in the loan. If they see the property you’re interested in as what they might term ‘illiquid’ – i.e. it will take a long time to sell because there is not much of a market for it – they won’t be falling them over themselves to offer you a mortgage, even at 50% LTV.

This can really take people by surprise. When buying a new build, it is essential that you check if the developer has their insurance all sorted. If not, your bank will not finance the development. It is important to know that this guarantee must be from a Portuguese institution: we had some from Gibraltar which were deemed unacceptable by the lenders – and this then caused significant delays.

This doesn’t happen too often and when it does it’s just bad luck, but in large developments banks sometimes turn down an application because it has already financed the allotted number of properties they are prepared to offer mortgages for – they basically aren’t prepared to expose themselves to further risk in that development. You never really know what the bank’s limit is – it can range from three units to maybe 10% of the whole development. 

In many cases, a client can simply go to another lender, but it can be an issue when a client finds a specific bank that has a product that really works for them and the bank then says, “No”.

That’s perhaps over-dramatising things a bit, but Portuguese banks are sensitive to political exposure, and this means that diplomats and government officials can find it difficult to obtain mortgages. A similar state of affairs exists for people who work for the UN, for example, mainly because they might have a contract which states that they cannot be prosecuted. In short, this creates an issue that some lenders are just not interested in dealing with, so they refuse the loan. On a similar note, some large accounting firms have a long list of banks that their employees cannot work with.

If life insurance is required but you have existing medical conditions or your age is sufficiently ‘senior’ to result in premiums that are very high (or, worse, no insurance is available), then this can be a reason for refusal.

When it comes to retail banks, FATCA reporting requirements mean that many simply cannot be bothered to deal with American tax payers. We do have some solutions, but there aren’t all that many of them.

Portuguese equity release mortgages are not yet widely available from the average high street retail banks. There is a certain way of thinking running through the latin property and finance markets which seems to be that you should buy a property with a mortgage, you should keep the same mortgage to the end when it is paid off – and that’s it. Even refinancing/remortgaging tends to be greeted with a raised eyebrow.

All that being said, if we are talking about property transactions that run into the millions, then the private banks can be much more amenable to a clients’ specific needs. This is because they see a mortgage as a means to start a new relationship with a client. However, there are still restrictions – and it is far easier to release equity if there is some sort of refinance involved, either from a shareholder loan or from a previous mortgage on the property.

Many people who bought property in Portugal over the last 10 years have seen the price of their property soar. For those who bought by releasing equity in the UK, the gains will be magnified because of the current low trading value of sterling.

Restrictions on use of funds

A private bank won’t just let you unlock some cash from your property for any old reason – like a fancy holiday. Acceptable projects include:

– You want to pay off existing mortgages/loans

– You plan on purchasing new properties

– Making improvements on existing properties

– You want to fund the purchase of high ticket items

– To create financial assets that will be managed by the bank releasing the equity

Give us a call and we can explain all this further if needed.

Next: a quick look at the main tax considerations for people who want to buy a property in Portugal. There’s a lot to take in – and we always recommend tailored advice from an accountant – but our pointers will get you started…

Sorry about the pun – as with most countries, tax matters in Portugal needs careful consideration lest you fall foul of the authorities and find yourself with a large, unexpected bill to pay… 

It goes without saying that purchasing a property in Portugal will have some tax implications – sometimes significant, other times less so, depending on your situation. The smart way to proceed is with bespoke advice from a tax expert who has knowledge of both your home country and Portugal. We can make an introduction if required – but to hit the ground running, here are some pointers.

Since 2019, there is a basic rate of 28% of the net rental income to be deducted in Portugal (assuming you are renting your property out) and the rental income should be declared in your home country. For this reason, many people who have rental ambitions for their property out consider setting things up via a company structure. This has various advantages when it comes to inheritance tax – and can also reduce income tax payable on the rental income.

For property that is owned personally, the basic Capital Gains Tax rate in Portugal is 28% for non residents. This tax can be mitigated through various means, depending on age and whether or not you are a resident in Portugal at the time of sale.

The Portuguese version of UK council tax is Imposto Municipal sobre Imóveis (IMI). The applicable rates depend on various factors and vary from 0.3% to 0.8% according to property type, location and age.

Adicional Imposto Municipal Sobre Imóveis (AIMI): the tax authorities calculate property value using the Valor Patrimonial Tributário (VPT), which is usually lower than the actual market value and affects those with a share in Portuguese property worth over €600k, regardless of residency. Rates for companies are 0.4%, 0.7% for individuals and – where the combined property value exceeds €1 million – 1%.

Every individual has an allowance of €600k, so this means that couples with joint ownership only face AIMI if properties exceed €1.2 million, and even then only on the value above this.

Real estate in Portugal is subject to 10% Portuguese inheritance tax but, mercifully, not the laws of succession for most countries which have a double taxation treaty in place. Portuguese company structures come with the ability to transfer gifts during your lifetime. This is specialist stuff, so do ask us to connect you to an expert if you don’t have one.

Many people opt to use a corporate structure in order to optimise the tax situation relating to their ownership of a property in Portugal.

There is a (big) caveat before reading the information below – and that is to reiterate that this is merely an overview of what we have observed, and what we perceive to be the reasons for the choices that buyers make. We are not able to give individual tax advice, so please do not rely on any of this information. You should always seek advice from a qualified professional. We can help introduce you to someone with knowledge in this area if required.

Own name

Holding a property in your own name can be very tax efficient in Portugal, but it can be difficult to transfer shares of the property to your children. If it’s your intention to rent out the property, then it is likely that you will not have to pay income tax in Portugal, though the income will be taxed in the UK. It might be possible to structure the purchase under the UKs ‘furnished holiday let’ rules – though this needs careful investigation to ensure that it is indeed an option and is the right path for you.

Unfurnished rental or optimised family home

In cases of this nature, we might see an SCI used – this is a type of private limited company that can be set up in Portugal. It is transparent for the purposes of Portuguese tax, while being opaque for UK tax purposes. This means that if a property is rented, then the income will be sheltered in Portugal where there isn’t much tax to pay on the income because you can deduct the interest on the loan – plus a portion of the value of the property. Shares held in the SCI can be transferred to children.

Furnished, seasonal lets and family homes

When it comes to furnished rentals we see the SARL de famille being used – this structure is, however, available to close family members only. It is transparent for Portuguese tax – meaning that owners can use their personal tax allowances – while being opaque for UK tax, which means that the income is not subject to tax until the funds are repatriated to the UK. The shares in the company are transferable – so inheritance tax can be mitigated.

STAMP DUTY

One of the biggest potential barriers on the path to a smooth purchase  is to think that Portugal is just like the UK (or another home jurisdiction). It really isn’t. The Portuguese have a very specific way of doing things and a different frame of reference to what you may be used to. Prepare to have your eyes opened!

Expect paperwork to be on another level

Novices quickly need to get used to the idea that original copies of all documents have to be sent. They also need to be signed and initialled on all pages – with no mistakes or crossings-out allowed. It is very unlikely that the bank’s long-established standard processes can be deviated from. All the applicant can do is smile – and submit to the demands of the bank.

The main risk with all loans – as far as the bank is concerned – is the risk of default. The next biggest risks are negative equity and transactions that place other assets at risk. If you default on your mortgage payments for long enough, the bank will call the loan in… resulting in them presenting their case in court and obtaining permission to sell the property. When the property has been sold, the loan will be cleared and the balance – if there is any – will be returned to you. 

But if the property sells for less than the sum you still owe, it may be possible to come to an agreement with the bank, where they waive the balance… although they may try to pursue you in the UK for the balance. They can select the latter option if they wish simply because all mortgages are personal loans, meaning they can go after you personally. The same is true for a loan made to a company. Because of all this, it is very usual for the borrowers also to be the guarantors of the loan.

Portuguese banks know that they can walk in and repossess properties in the event of default, so this gives them a certain confidence in their ability to offer such low long-term rates. While this is excellent for the buyer – and has shaped the entire mortgage market in a generally positive way – in some cases people would rather like to refinance a loan. Perhaps they are looking to improve on a loan fixed when rates were very high, for example, or they are addressing an interest-only loan which is about to expire. Changing a mortgage mid-term is not common in Portugal and can, therefore, be complex.

Buying a house in Portugal is based around a very fair and equitable system. You have your offer accepted, a contract is signed – which is not breakable – and you can then feel confident you will get the property you agreed to buy. You can even stipulate that you will only buy on condition of being able to get the finance you need. However, in fast-moving property markets such as Lisbon, you can sometimes be pressured to sign without a mortgage clause (the clause protects you to get your deposit back if you cannot be financed by a bank or get the term stipulated in the sales contract) in order to secure the property. No problem – providing you do this with your eyes open and preferably have the funds to buy in cash – or you leave plenty of time before completion to get the mortgage (six months if possible) to bring the risk right down.

A post-finance mortgage is not that common, but does exist: it is one that you take out after having already made the purchase in cash. A mortgage of this type is certainly possible in Portugal, but it is a very good idea to get a decision in principle first if you are depending on getting one. Generally, you can get the same conditions as you would for a regular mortgage, as long as you apply within six months of purchase. 

Currency markets rise and fall and are something that all potential overseas home-owners should bear in mind. If sterling, for example, were to fall further than its recent lows, then making monthly mortgage payments in Euros that have been exchanged from UK earnings would become more expensive. Similarly, when it comes to selling, currency rates present another potential concern. If you bought for cash at 200,000 euros when that equated to £180,000 and then sold at a later date when 200,000 was suddenly worth £160,000, you’d obviously be worse off.

Most people agree that it is better (safer) to have your exchange rate risk tied to the monthly mortgage payment, rather than the value of the property. For instance, it would be better to pay 15% more for your mortgage payments every month than being forced to sell through a change in circumstances and discovering the value of your property is 15% less than when you bought it. On a related note: if you receive rental income in Euros, then it makes sense to choose a loan that is paid in the same currency in order to lessen any exchange rate risk.

As things currently stand, with the Euro historically strong (January 2021), it is worth considering a 100% Portuguese mortgage in euros, if available, to reduce the need to transfer funds to Euros until the exchange rate moves in your favour. This would, of course, be a speculative move, though. Rates go up and down.

Finally, a word about the risk of your lending rate changing once the mortgage application gets to the committee stage. It can and does happen, despite it being something no one really wants. Nine times out of 10, the bank will impose no change to the rate when this happens, but if there are some risky elements or there is something unusual about the loan – or perhaps we have clearly entered a rising rate environment – then the committee may decide to increase the rate in order for the loan to continue to make business sense for them. Charities they most definitely are not.

None of the above was intended to put you off – a Portuguese citizen reading about UK mortgages would likely have found it all equally eyebrow-raising – but it does make sense to inform yourself of the most likely pitfalls before starting out on your journey. Next – some good stuff. A look at some of the many ‘hidden’ advantages of snapping up a new home in Portugal…

In spite of what some people believe, Portugal is an extremely attractive place to invest in when it comes to real estate. Whilst property values can certainly fluctuate, buyers can usually rely on steady growth in the value of the property – plus make use of a very advantageous tax situation. 

Combine the above with the peace of mind that comes with long-term, ultra-low Portuguese mortgage interest rates in one of the safest countries in the world and you end up with a recipe for a terrific investment opportunity that you can enjoy with your friends and family. That’s only our opinion, of course!

In Portugal, real estate investments normally attract little or no tax for up to 20 years. Please note: you do have to use an accountant to make sure that all your tax affairs are properly managed, but then that is fairly standard procedure in most countries. It is even possible to structure a purchase so that you will have no tax to pay on the rental income in your home country.

You can read more about all of this in our guide to Portuguese property taxes.

This has been a thread throughout the guide, but is worth repeating again. Remember that in Portugal – unlike the UK – it is possible to fix your mortgage interest rate for 20 years. Incredible, but true: 20 years. Fixed for the entire duration. Some people are able to fix their mortgage at a rate of 1.5% for 20 years. At rates like this, you really wouldn’t be paying back a whole lot more than the capital, and it would spread out over two whole decades. Compare that to UK mortgages in the 70s when rates were so high you’d have paid back well over twice what you borrowed…

Yes, it’s true that interest-only mortgages are pretty thin on the ground in Portugal, but if you can get one you can fix the rate for many years. Plus, you can pay almost no tax – and if you put down a 40% deposit, you might not have anything to pay for almost 15 years because the mortgage payments should (disclaimer: we said “should”!) be covered by income from renting it out.

Buy-to-let mortgages in Portugal are available at very attractive rates when compared to those of neighbouring countries. That being said, one important point to note is that, unlike the UK (and, indeed,  many other countries), Portuguese banks will always look carefully at the borrower’s financial situation and won’t be too beguiled by the future potential rental income of a property. 

It’s worth remembering that there is more flexibility than ever when dealing with a private bank – so if the goal for a client is, say, to add value to a property and refinance, then it may be that a private bank may be a better option. As we have explained, though, there will be additional capital requirements in order to meet the wider relationship expectations of the bank.

To add a warm custard to your pastel de nata, banks in Portugal can only charge 0.5% for variable rate balances and 2% for fixed rate mortgages on any sums you pay back early on the long-term fixed rate. 

Note that early repayment charges are limited to 2% of the amount that is paid off early. It may vary, however, if you buy using a company structure.

Just how much can I borrow?

Most banks will lend 70% of the purchase price, though some will lend 100%, excluding the purchase costs.

Currently, all mortgages are what are known as ‘status’ mortgages, which means that the decision about whether to lend to you or not will be based on your personal status. Specifically, the banks will look carefully at your income and outgoings. Banks will permit you to spend up to a third of your gross monthly income (less any existing monthly repayments) on loans. They will also take a slice of existing and future rental income into consideration when doing their sums.

Can I borrow if I am self-employed?

This should not be a problem. There are several ways to provide the information to the bank that will be acceptable to them – your consultant will find the best one for you. Please take a look at the required documents for self-employed borrowers and contact us with any queries.

Check the list of required documents to apply for a mortgage in Portugal.

What fees do I need to know about when getting a Portuguese Mortgage?

Your bank will charge a set-up fee. The ones that we work with range from 0.3% to 1% of the loan amount. This is payable when the deed of sale is signed.

The broker fees: we charge a fee of 1% of the loan amount in the event of a successful purchase. This, too, is payable at the signature of the deed of sale.

There are also the notario fees: this is the equivalent of the stamp duty. It is about 0.8 to 8.8% of the purchase price  and, once again, is payable at the signature of the deed of sale.

There is also a 1% mortgage registration tax.

All the costs above are laid out in our Mortgage Information sheet – which you will receive with your purchase guide when you work with Portugal Private Finance.

Why do you sometimes not charge a brokerage fee?

Occasionally, a bank will pay us when a sale goes through and it will be high enough for us to waive our brokerage fee. However, most regional banks do not pay us anything – or a tiny amount compared to the work done – so in most cases we do need to charge a fee. Any fee will be properly displayed in the purchase guides and the Key Fact Illustration.

What are the early repayment penalties?

Early repayment charges are limited to 2% of the amount paid off early. This may vary if you buy through a company. As an example, for €100,000 early repayment, you will be charged €2,000.

Generally, there are no repayment penalties for variable rate loans – but please check this on your mortgage offer.

Using a bank or a foreign exchange broker

You should be aware that there are alternatives to using a bank when it comes to international payments. If you opt to use a specialist foreign exchange broker, for example, you could save a lot of time and money.

Currency brokers of this kind operate specifically to help people transfer money – meaning they can focus on securing you a better exchange rate and providing a more tailored service than a bank. The benefits each currency broker offers will vary, but typically you can expect:

• Better exchange rates
• Speedier transfers
• Low (or even no) transfer fees
• Dedicated customer service

Are there advantages in taking out a Portuguese mortgage?

In most cases, yes. The borrowing rates are typically 1-2% lower than for comparable UK products, and the interest on Portuguese loans is also tax deductible. For investment purposes, it is generally accepted that it is preferable for the exchange rate risk from Sterling to Euro is on the monthly repayment, instead of being on the whole value of the property (just ask us for a full explanation if you’re scratching your head about why). Also, local loans offer very good long-term fixed rates – these provide security at lower costs.

Is everything ‘business as usual’ at Portuguese banks? 

Not quite. Banks are becoming more cautious with their lending. We have had some of the banks we work with adding minimum income requirements before approving loans. Some have also been withdrawing from the non-resident market – and there have been incidents of putting applications on hold for UK clients. Call us for the latest advice, potential issues and work-arounds.

I read that the mortgage requires a ‘collateral fund’. What is that?

This is a set of assets that are placed under management at the bank. It will be invested in various funds – including stocks, bonds and fixed-term deposits. The actual asset allocation will largely depend on your risk profile. When working with your adviser, you can select from a range of securities such as: 

– IE00B3XXRP09 Vanguard SP 500 UCITS

– FR0007063177 LYXOR NASDAQ-100 UCITS

– LU0616240585 AMUNDI BOND EURO AGGREGATE

The collateral that the bank holds is locked until the mortgage is paid off – although it can be reduced if the initial collateral-to-mortgage ratio is maintained. 

Why are the banks asking for so many documents?

Portuguese banks don’t really have an official credit check system, so – to appease their compliance and risk committees – they will sometimes ask for a UK credit report. They also need to manually check your income documents (such as your tax returns) or bank statements to make sure there is no other debt. They also like to get a handle on how you manage your debt and expenses.

Is the actual mortgage application process complex?

Yes and no. Applying is pretty straightforward if you comply with all that they are after; receiving an offer following this important first step can take anywhere from a few weeks to three or four months. A lot depends on when you produce your documents and how quickly we can get a final approval from the bank.

Once you have settled on a specific mortgage product (we are, of course, around to help you during this stage), you will need to send us all of the required supporting documentation. Once the bank has a complete file, they will send you a final simulation showing what the loan would look like in practice; assuming you don’t pull out now they will send off your file to their lending committee to see if it can be approved. If everything goes to plan, they will offer you the loan.

When you have received the offer, you are obliged to wait a minimum of 10 days before accepting it (or not!) – a good, old-fashioned “cooling-off” period, basically. You have a month to accept the offer. If you do accept it, the offer is valid for up to eight months in most cases – it depends on the bank. You need to complete the purchase of your property during this period. If you need an extension to this window, you might be able to get one – under certain circumstances.

What’s a typical amount of time for a mortgage to be approved?

To get an agreement in principle, we’re normally talking just a couple of days. But that’s barely the beginning – if you’re talking about the application being officially approved by the bank’s various committees, it’s more likely to take about four months.

What payment options do I have during the construction of a property?

Most of the Portuguese banks offer the chance to pay interest only on the sums that are drawn down by the developer during the construction. You’ll still need to pay life insurance during this period, though. This arrangement can last up to 36 months. Full payments can be deferred until 100% of the mortgage funds have been released.

What are the current Portugal mortgage rates?

For an interest only loan, you can usually secure a rate of 2.35% fixed over 10 years.

For a repayment loan, we’re looking at 2% fixed on 20 years (at 70% LTV).

Variable rates are available from some banks – these generally follow the Euribor 3 months, plus the bank’s margin. It is worth noting, though, that variable rates are quite rare today due to such attractive, low fixed rates.

What exactly is ‘the Euribor’?

The Euro Interbank Offered Rate is the rate at which European banks (and associated institutions) lend money to one another.

Check online at the Euribor/European Banking Federation.

I’ve seen a good rate – how can I secure it?

In order to seal the deal on a rate that you have been quoted, you would need to send us all the required documents for the loan application as quickly as you can. Once we have them, we can usually forward them to the bank that day and reserve the rate for you. Rates can change twice per month, so it makes sense to be as prepared as you possibly can before making an offer – strike when the iron is hot, and all that.

My rate is different to my friend’s. Why?

Most banks work on a regional basis, so what’s available in one part of Portugal may simply not be on offer in a different one. We will always try and get you the best rate, though sometimes our hands are tied (less so when private banking). 

If we can put down a larger deposit, will that get us a better interest rate? 

Not necessarily – but it can certainly help when we are negotiating. 

What is the TAEG (Taux Annuel Effectif Global)?

The TAEG is the Portuguese equivalent of the APRC (as it is known in the UK): it is the annual percentage rate of charge. It includes the following costs (figures shown are for a mortgage of 3.92m euros):

+ Mortgage tax: €53,058.30

+ Collateral guarantee: €255

+ Life insurance: €117,600

+ Bank fees: €25,000

+ Broker fees: €29,400

+ Total interest: €555,176.80

Total mortgage cost = €780,490.10

+ Capital = €3,920,000

Total repayment = €4,700,490.10

The APRC calculation is not the easiest thing to fathom if you’re not familiar with it; your best bet is to use excel. The formula is =RATE(240,- 4700490.10/240,3920000) which gives a rate of 0.16% per month when rounded to the second decimal point. Simply multiply by 12 to get the annual rate of 1.92%. We can help you if you’re confused by all this (many are!).

What is the income tax for non-residents?

An income tax liability of 28% is charged for Portuguese non-residents who are members of the EU (which, of course, UK residents no longer are). This liability can be offset against:

– Loan Interest

– 80% of the value of the property

Needs a line here about Brexit and what the tax implications are now. It should be possible to avoid paying any income tax over a period of 20 years as a non-resident – depending on how the purchase is structured. But please always seek tax advice from an expert who understands the tax laws of both Portugal and your home country. We can make introductions when needed.

If you’re still with us – congratulations! You now know more about Portuguese property buying than about 99.9 per cent of the world. Your reward? These five ‘boring’ tips (they’re actually quite helpful, really!)...

1) Build up some ‘rainy day’ funds – and be prepared to show them.

As in the UK, there are always a number of additional buying costs on top of the deposit that you will be putting into the property. But try and think longer-term: Portuguese banks will also want to see a buffer that stretches well beyond your initial outlay. These ‘rainy day’ funds show that if anything unexpected happens, you have the safety net to take care of it.

2) Swot up on the eligibility criteria

Banks have no problem lending to overseas buyers… but only if they meet their lending criteria. Because Portuguese banks do not have access to credit scoring data, though, they will assess your application based on proof of income. For employed people, that means three years’ tax returns and three months’ proof of income. Self employed? They will want to see three years’ accounts.

3) Get some professional advice

One of the main reasons that Portuguese mortgage rates are so joyously low right now is that the banks are heavily competing with each other for buyers. As a result, an international broker with specialist knowledge of overseas mortgages for non-residents will be able to find products which are more attractive than those available to buyers who go to the bank direct – and at no extra cost.

4) Ask if you’re being realistic about rental returns

When making a buy-to-let purchase, make sure you are confident about the returns you expect to make, especially if you are banking on these to make your mortgage payments. Ask around, find what the current state of play is on owners forums and so on – in short, make sure you’re not going to over-stretch yourself.

5) Understand the system

The latin mortgage system which prevails in Portugal is more regulated than in the UK – which is what makes it so secure. This is also part of the reason why the banks are able to offer such low rates over such long terms. That’s the plus side – the potential headache, though, is that this can sometimes mean the application process takes a bit longer, so accept that you really can’t rush things.