Bank Mortgage Spreads at Eight-Year Low

1 August 2018

In 2017, average spreads on residential mortgage contracts stood at 1.74%, as banks’ profit margins on loans fell back to levels last seen in 2010.

Banks are making less money on residential mortgages, as commercial margins began falling again last year. In 2017, the average spread on mortgages fell to its lowest level since 2010, the Bank of Portugal (BdP) revealed.

The BdP’s Retail Banking Markets Supervisory Report revealed that the spread on variable rate housing loans stood at 1.74% in 2017. This rate represents a decrease of 25 basis points compared to the average spread on mortgages signed in the previous year. The Bank of Portugal added that those margins are at their lowest level since 2010.

“The average spread on residential mortgages indexed to the 3, 6 and 12-month Euribor stood at 1.74 percentage points, down 0.25 percentage points from the average spread for mortgages signed in 2016,” said the report. “This year, the average spreads for variable rate contracts continued the decline that began in 2015 and have now reached levels similar to those of mortgages in 2010,” the Bank of Portugal explained.

These numbers are not surprising considering the consecutive downward revisions that Portugal’s banks have made to their margins on residential mortgages, something that is continuing to this day. Currently, the minimum margins that banks charge on mortgage loans range from 1.15% at Bankinter to 1.5% in BPI and Montepio. On the other hand, maximum spreads fluctuate between EuroBic’s 1.4% and CGD’s 5.35%.

The BdP’s figures attest to the reality that, banks largely extended housing loans to customers with lower risk profiles in 2017, considering that the average spreads currently being practised are close to the banks’ minimum margins.

The Portuguese central bank also explained that, in comparison with the previous year, the proportion of contracts with spreads between one and two percentage points increased, while the proportion of contracts with spreads between the two and 4.5 percentage points fell.

Despite the reduction in spreads since the peak of 2013, the Bank of Portugal noted that “these continued to be higher than the average spreads observed at the end of 2016.”

Original Story: Economia Online – Catarina Melo

Translation: Richard Turner