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Residential Mortgages: 50 Months of Saving for Down-Payment
11 November 2017
On average, households in Portugal require 25 years of work and one-third of the families’ income to buy a home (a 120 m² home), four of which correspond to savings for the initial down-payment.
This is one of the conclusions of a study developed by the platform ComparaJá.pt that sought to analyse the maximum amount of funding that a couple can request to buy a house in each municipality of Portugal without stressing their effort rate, an indicator that aims to avoid future situations of over-indebtedness.
The report demonstrated who any families are having difficulties attaining their dream of buying their own home due to increases in the price of real estate in recent years. While some regions in the interior of Portugal stand out for the relative ease of acquiring property, requiring on average, only 15 years of work, the reality in other parts of the country is entirely different. A home in the Algarve requires, on average, 42 years of work, in Lisbon, 36 years and Madeira, 28 years. The findings highlight the disparities between wages and the average price per square foot in the various regions in Portugal.
As a result of these disparities, four in ten of the more than 6,000 Portuguese nationals who used their free home mortgage simulator between March and August took out loans there were too high compared to their incomes.
“Based on our study and use of the simulator, by adjusting loans values and terms, people can understand how to tailor their mortgage loans, adapting them to their financial capacity so as not to push their effort rate above the recommended limit – which is about one third of the household’s monthly income – and, consequently, avoiding a possible default on the loan,” Sérgio Pereira, founder of ComparaJa.pt, explained.
Only 40% of consumers selected a duration/loan amount ratio that allowed them to keep their monthly loan payments below the recommended threshold (approximately 1/3 of household income). Of the remaining users, 19% had effort rates ranging from 36% to 40%, which places them at a risk level which, as a rule, leads to disadvantageous loan terms or the inability to get a loan at all.
The analysis was performed considering a monthly effort rate of 33%, the minimum term of a housing loan for the purchase of a house with 120 m² in each locality and a repayment term of 30 years, and the maximum amount of mortgage credit that is accessible to each family.
Based on these two hypotheses (whether through maturity or value), borrowers can adjust their housing loan application in such a way as not push their effort rate above the recommended limit, thereby avoiding over-indebtedness. Another aspect of housing loans that is often neglected by consumers when buying a home was also considered – the savings necessary to cover the value of the initial down-payment, an amount that, as a rule, corresponds to 20% of the purchase value of the property.
The findings point to high inter- and intra-district asymmetries: living and working in a municipality may lead to up to a decade less of work to acquire a larger home, compared to the district next-door.
The study shows that in the case of the district of Faro when taking into account the salary and price of the average square meter in each municipality, simulations using ComparaJá.pt show that to buy a 120-square-meter home in Lagos ( a county that presents the average price per square meter), for example, a couple would have to work for a total of 64 years. In Alcoutim, the county with the lowest average price per m2, the same couple would only need 20 years. A house with the same dimensions in the municipality of Faro would require 34 years of work.
In the municipality of Lisbon, a couple would need to work for 60 years to acquire a home of the same size, given average salaries and price per sqm in this locality. If the couple lived and worked in Oeiras, buying a property would take almost half the time: 31 years. In Sintra, a couple applying for a 30-year home loan would be able to acquire a 166 sqm property (82 sqm in Lisbon). If the same couple were to work and live in Azambuja, a 30-year loan would buy a 251 sqm home.
Porto, which has the highest average price per square meter in the district, a couple that applies for a 30-year home loan, taking the maximum financing amount of 179,421 euros, would be able to acquire a property of 130 sqm. In Felgueiras, those same conditions would buy a home measuring 244 sqm. Finally, if this same couple lived and worked in the most populous municipality of this district, Vila Nova de Gaia, they would be able to acquire a 171-m2 property.
The values broken down for each district can be found, in Portuguese, at:
https://www.comparaja.pt/credito-habitacao/estudo-tax-esforco.
“Due to the high inter-district and intra-district asymmetries that are currently the norm in Portugal, living and working in a contiguous municipality can mean at least a decade less of work to acquire a larger home. Without a doubt, some areas of Portugal are becoming prohibitively expensive and out of the reach of families with less income,” Sérgio Pereira warned.
Original Story: Diário Imobiliário
Translation: Richard Turner