In December 2022, nine out of ten Portuguese households had their mortgages indexed to the variable Euribor rate, which is rising month by month as the European Central Bank (ECB) raises the key interest rate (currently at 3.75%). The most recent data from the Bank of Portugal (BdP) indicates that last year "half the families with mortgages had an increase of at least 17% in the value of the instalment", a scenario that will be increasing this year. The effort rate, in turn, is expected to exceed the 40% mark by the end of the year for many borrowers, particularly those on lower incomes.
"The increase in rates on new loans to businesses and households for housing has been more pronounced than in previous rate hike cycles, keeping pace with the high rate hike in headline rates in 2022. In December, average rates on new mortgages to companies and households for housing stood at 4.4% and 3.2% respectively in Portugal, 2.4 percentage points (p.p.) above the December 2021 figures and at the highest levels since January 2015 and June 2014, respectively," reads the report from the BdP Board of Directors, released on Wednesday 17th May 2023.
According to the document, "in 2022, debt service increased for most households and companies. Last year, adds the regulator, "the total amount of interest paid by households increased by 24.6% (43.4% in home loans)", with the increase in interest paid occurring mainly in the second half of the year. "At the end of the year, the majority of contracts had not yet had an update that fully reflected the sharp rise in key interest rates in 2022," the BdP points out.
With regard to the increase in the monthly mortgage instalments to be paid to the bank following the rise in Euribor rates, the entity led by Mário Centeno reveals that, "in 2022, half of the Portuguese households with home loans had an increase of at least 17% in the value of the instalment".
"The increase in mortgage instalments in Portugal was more pronounced for younger borrowers, which reflects the fact that, in more recent credit contracts, interest payments have a greater weight in the instalment. In the age classes 18-34 years, 35-54 years and 55-80 years, half of the borrowers had an increase in instalments of at least 19%, 16% and 6%, respectively," the report reads.
Effort rate soars on lower incomes
Meanwhile, writes Jornal de Negócios, based on estimates by the BdP, among the 20% of mortgage borrowers on the lowest incomes, two thirds will see their debt service ratio exceed 40% by the end of the year. The rise in interest rates could lead to an increase of 11 p.p., to 18.6% in December 2023 - the proportion was 7.7% in June 2022, writes the publication.