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How the Housing Lending Market Has Changed Since the Troika Came to Portugal

10 August 2017

Banks haven’t doled out so many housing loans since the beginning of the decade – before the crisis and the troika’s passage through Portugal. Just in the first half of this year loans totalling EUR 3.8 billion were granted. This number represents a growth of 42% over the same period last year. On average, the banks granted more than 20 million euros of this type of loan each day.

Last June, the volume of new loans to finance the purchase of homes reached 754 million euros. This is the highest figure since December 2010. In monthly terms, there was an increase of 26 million euros compared to the total loans granted in May, the latest data from the Bank of Portugal (BdP) show. In 2016, 5.5 billion euros of home purchase financing was granted (39.6% more than in 2015).

New credit operations are accompanied by an average interest rate of 1.69%, which compares with 1.68% a month earlier. Still, the price of money charged by banks remains at a record low. A year ago, the rate was 0.25 points higher.

While the minimum margin practised by banks operating in the Portuguese market was at an average of 2.78% in the beginning of 2015, it currently amounts to just 1.49%. This is because most national banks already have spreads of less than 2% in their price list.

Fixed rates seeing higher demand, but variable rates continue on top

 

But the domestic housing credit market is seeing some changes: fixed and mixed rates are gaining in popularity, although variable rates continue to dominate in new contracts. In 2016, fixed interest contracts grew by 164.5% and mixed rate contracts increased by 95.2%.

Looking at all of last year, variable interest rates represented 83.4% of the 57,912 housing loan agreements entered in 2016, falling short of the 89.5% verified in the previous year. Fixed rate contracts accounted for 4.9% of total loans last year, compared to 2.5% in 2015, according to the latest Banco de Portugal Retail Banking Monitoring Report.

These figures mirror the banks’ growing focus on offering fixed-rate housing credit, given the historically low level seen in benchmark interest rates – such as Euribor – which have been negative for more than two years, as well as the tendency of those looking for financing to try to protect themselves from future climbs. The current low interest rates can be gainfully compared to those in 2008 when Euribor surpassed its peak of 5.5%.

This concern has been evident in loan renegotiations, where “changes in interest rate types, mostly from fixed rates to variable rates, have appeared for the first time as one of the three most renegotiated conditions,” the BdP report says.

85% of variable rate contracts used the 12-month Euribor

With regards to variable rate loans, which continue to account for the great majority of new housing loans, there has been a widespread adoption of the 12-month Euribor rate. This rate was used in 85.3% of new contracts, whereas in 2015 it had represented only 25% of the total.

Three-month Euribor indexed contracts accounted for 0.9% of new contracts, down from 14.1% in 2015. Six-month Euribor accounted for 12.3% of contracts, compared to 59.4% % in the previous year.

Banking institutions have also been more inclined to loan larger amounts of money. At the peak of the crisis, in 2013, banks only financed about 60% of property valuations, but currently, there are already institutions that finance more than 80% of valuations, a figure that is still far from the 100% financed at the peak of loan approvals between 2004 and 2007.

Original Story: Idealista

Translation: Richard Turner