If your mortgage loan agreement refers to Euribor as the index of the interest rate to be applied to your loan, then it is because you are part of the vast group of borrowers in Portugal who use a variable interest rate in their mortgage loan agreements ( more than 90% of the total).
The current economic situation is characterized by the existence of an inflation rate that has not been seen for a long time (10.2% in Nov 2022 | source: Banco de Portugal), which has been fought by the European Central Bank through regular and successive increases in the main reference interest rate of European Union countries, the Euribor.
This situation of growth in the inflation rate alongside Euribor increases is a recent phenomenon and verified in a very short period of time (1.3% was the average inflation rate in 2021 | source: INE) (Euribor 12 months: -0.505 % on 12/01/2021 and +3.316% on 01/02/2023 | source: Banco de Portugal). Hence, at the end of 2022, the Government approved a decree-law (DL n.º 80-A/2022, of 25 November) which aims to support families in reducing the negative impact of changes in the index of the overwhelming majority of mortgage loans made in Portugal for the acquisition or construction of permanent housing. This legislation is applied in line with the current wording of another decree-law (DL n.º 227/2012, of October 25), which focuses on the prevention of regularization of situations of non-compliance with credit agreements and creates an extrajudicial support network for these bank customers within the scope of the regularization of these situations.
And what recent support are these?
This support applies to loan agreements with outstanding capital of less than € 300,000 (three hundred thousand euros).
It is established that banks must proceed:
a) regular monitoring of the financial situation of its customers/borrowers;
b) an assessment of the effect of changes in the reference interest rate (the Euribor) on the financial capacity of its customers/borrowers, at least 60 days in advance of the next interest rate setting; and
c) submit appropriate proposals for this situation.
How do banks assess the effect of changes in Euribor?
a) They evaluate it based on the significant worsening of the effort rate of their client/borrower:
a.1) When the effort rate reaches or exceeds 36%
a.1.1) as a result of an increase of 5 percentage points compared to the effort rate in the same period (or compared to the date of its conclusion, if the contract was signed less than 12 months ago)
a.1.2) as a result of an equal or greater increase in Euribor compared to the value considered for the purposes of projecting the impact of the future increase in Euribor (presented in the loan agreement)
a.2) When the effort rate is greater than 36% in the same period (comparison) and there is an increase in the same or Euribor (under the terms of points a.1.1 and a.1.2)
b) They evaluate it based on the existence of a significant effort rate, that is, equal to or greater than 50%
Note: the effort rate is for each customer is evaluated based on the ratio:
installment (annualized) of all loans / total (annualized) income (net of taxes and contributions to Social Security)
What are the existing solutions to reduce the income installment payable to the bank?
Use of customer/borrower savings for partial or total repayment of the loan (this solution can be applied regardless of the amount owed)
The transfer of the credit agreement to another credit institution
The reduction (temporary or definitive) of the interest rate
Debt refinancing
Note: the individual or combined application of the solutions listed above keeps the risk profile of the customer/borrower practically unchanged, without any visible 'signal' in their map of credit liabilities with the Bank of Portugal.
Extending the term of the loan agreement
The creation of deferrals in capital amortization
The creation of grace periods for capital amortization
Credit consolidation
Note: the individual or combined application of the solutions listed above will be recorded and visible in the customer/borrower's map of credit responsibilities at Banco de Portugal; in the future, this could make it more difficult or more expensive to access new credit.
Additionally:
It is prohibited to charge bank commissions for renegotiating the conditions of home loan contracts
A temporary suspension (until 12/31/2023) of the early redemption fee is applied
Exemption from payment of emolument fees is applied in situations resulting from the restructuring of the mortgage loan agreement
All of this certainly made you think about your current home loan agreement, right? Then maybe it's time to get free, expert support to assess your current situation in terms of your home mortgage loan agreement(s).
Contact us so that we can advise you on the next steps to take.
Get advice, evaluate, conclude and make decisions!
Sources: DL No. 80-A/2022, of November 25
DL No. 227/2012, of October 25
‘Public’ article of 04/November/2022
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