Early Full-Repayments on Mortgages Reached High in 2017

10 May 2018

The total amount of early repayments of housing loans reached a peak in 2017 and were mainly made by older borrowers, without resorting to new loans.

The total amount of early repayments of housing loans reached a high in 2017 and were mainly made by older borrowers, without recourse to new loans, the Bank of Portugal (BdP) reported on Thursday. In its Economic Bulletin, released on Thursday, the BdP said that while full prepayments of housing loans had fallen in the years to mid-2014, “they increased significantly in the following years, peaking in 2017.”

According to the central bank, most of the early repayments “were made by debtors who did not take out new home loans, suggesting that changes of homes or banks had a reduced contribution to the dynamism observed in the repayment of housing loans.” According to the BdP, the increase in early repayments on mortgage loans in recent years “may be related to the increase in the spread between interest rates on loans and deposits and the fact that deposit interest rates are close to zero.”

At the same time, “within the context of a very significant increase in housing prices, these total early repayments may still be associated with the sale of real estate without involving the contracting of new loans for home purchase by these debtors,” the institution inferred. The BdP also noted that the weight of the sales of used properties vis-a-vis the total amount of real estate transactions has increased considerably since 2009.

On the other hand, most of the new loans are granted to borrowers who have not made full repayments of home loans in the previous six months. “Thus, most of the new housing loans could be contributing to a significant increase in the amount of debt held by the individuals who contract them,” the Bank of Portugal stated.

Debtors who make early repayments and do not take out new loans “are often older than those who take out new loans.” According to the BdP, this is because the purchase of the first homes is usually carried out “in relatively young age groups, as well as the fact that individuals’ income and wealth tend to increase during life.” Thus, the central bank concludes, “the relative stability of aggregate debt balances for housing purchases conceals a high heterogeneity regarding the evolution of debt by the borrower.”

“In most cases, borrowers who take out new home loans and debtors who make significant repayments of this type of credit are not the same, the former being on average slightly younger. Thus, there is a significant reduction in the amount of debt held by some individuals and a significant increase in the amount of debt held by others,” the BOP reasoned. Debtors who made early repayments have relatively low indebtedness ratios, since they are, on average, older than the rest, the BdP concluded.

Original Story: Observador / Agencia Lusa

Photo: Paulo Cunha / Lusa

Translation: Richard Turner