Today Banco de Portugal publishes its first progress report on the macroprudential measure (for the moment, the Portuguese version only) in force since 1 July 2018, within the legal framework of new credit agreements for consumers. The measure, adopted as a recommendation, introduces limits to the criteria used by the institutions when granting new credit, with the purpose of mitigating the build-up of risks, increasing financial sector resilience and promoting households’ access to sustainable financing. 

In accordance with the Recommendation, Banco de Portugal will monitor the implementation of the established criteria at least once a year and monitor the evolution of credit excluded from the scope of the measure. This Report is a first analysis of the early months since this Recommendation entered into force, with the purpose of assessing the degree of its implementation by the institutions.

According to the analysis, the limits established in the Recommendation are appropriate and effective in reaching the objectives pursued. 

Banco de Portugal has decided not to introduce any changes to the Recommendation for now. The measure will be assessed once again in the first quarter of 2020. 

Borrower’s risk profile improved

The Report now published is mostly based on information on new credit to households reported by a sample of 13 institutions, including institutions specialised in consumer credit, representing around 93% of new household credit business. 

There is convergence towards compliance with the limits set out in the Recommendation, which is reflected in an improvement in the borrowers’ risk profile. 

The exceptions established in the Recommendation for the DSTI ratio (ratio of the monthly credit instalments to the borrower’s net monthly income) are being complied with. Only a small margin of the exceptions is used in the case of the 50%-60% DSTI ratio.

The LTV ratio (ratio of the amount of loans to the value of the property pledged as collateral) converged to a large extent towards the limits, which vary according to the purpose of the credit. The amount of loans exceeding the limits represent only a small fraction of total housing loans. The same conclusions may be drawn for limits to maturity for both credit relating to residential immovable property and consumer credit.

For the most part, the institutions duly provided justification for loans not meeting the requirement of regular payments of interest and capital, on the grounds that they were bridging loans.

No significant changes have been identified in the pattern of granting of credit not covered by the Recommendation, nor in the distribution of new credit relating to residential immovable property by borrower age. 

The limits to the LTV and DSTI ratios and to the maturity, as well as the exceptions to these limits and the requirement of regular payments of interest and capital in new business, will remain unchanged until the new assessment by Banco de Portugal of the Recommendation’s implementation.

Banco de Portugal will continue to monitor the implementation of the Recommendation by the institutions covered by this macroprudential measure, so as to prevent potential distortions of competition or actions that may jeopardise the Recommendation’s effectiveness.

About the Recommendation 

The macroprudential Recommendation applies as of 1 July 2018 to new agreements for credit relating to residential immovable property, credit secured by a mortgage or equivalent guarantee, and consumer credit concluded by credit institutions and financial companies having their head office or branch in Portugal.

It established three types of limit to the criteria used in the consumers’ creditworthiness assessment, which the institutions should observe simultaneously: 

• to the ratio of the amount of loans to the value of the property pledged as collateral and the minimum between the purchase price and the appraisal value of the house granted as collateral (LTV – loan-to-value). 
• to the ratio of the monthly amount of instalments calculated considering a borrower’s total debt to his/her net monthly income, adjusted for the borrower’s age at the end of the agreement and his/her occupational status (DSTI – debt service-to-income). To calculate the DSTI, monthly instalments of the new credit agreement should be assumed to be constant throughout the agreement's lifetime. In the case of variable and mixed interest rate agreements, the impact of an interest rate rise must be considered. Furthermore, the DSTI should be calculated taking into account a reduction of the income of the borrower where, at the planned expiry of the agreement, the borrower will be aged 70 or over, except where at the time of the creditworthiness assessment the borrower is already retired.
• to the original maturity of the loans.

It also established that new credit agreements should have regular payments of interest and capital.

Banco de Portugal has chosen to implement the limits to credit standards in the form of a Recommendation, to avoid market disturbances, which are difficult to forecast given the measure’s innovative and complex nature. This notwithstanding, the Recommendation is subject to the ‘comply or explain’ principle, which means that the institutions concerned should comply with the set requirements and state the reasons if they do not do so.