Press Release of the Banco de Portugal on the implementation of the macroprudential Recommendation in force within the legal framework of new credit agreements for consumers
The Banco de Portugal publishes today the Macroprudential Recommendation on new credit agreements for consumers – progress report which shows broad-based compliance with this measure and an improvement in the borrowers’ risk profile over the course of 2020.
Almost all new credit for the purchase of own and permanent residence had an LTV (loan-to-value) ratio lower than the 90% limit, as already observed in 2019.
In turn, around 93% of total new credit for house purchase and consumer credit was granted to borrowers with a DSTI ratio of 50% or less (debt service-to-income ratio is the ratio of the total amount of monthly instalments of a borrower’s total debt to his/her net monthly income, whose calculation considers interest rate rises and income reductions, in the latter case when the borrower is aged 70 and over at the expiry of the agreement). In addition, only 5% of new business is associated with borrowers with a DSTI ratio between 50% and 60% (which is much lower than the exceptions provided for) and 2% of new credit was granted with a DSTI ratio of over 60% (within the 5% exception provided for in the Recommendation).
Overall, limits to the maximum maturity were complied with during 2020. However, the average maturity for new credit for house purchase stood at 33 years, increasing slightly from 2019. The Recommendation sets out a gradual convergence of the average maturity of new credit for house purchase to 30 years by the end of 2022.
The average maturity for consumer credit decreased from 8 to 7 years. This is line with the change in the limits to the maximum maturity for new personal credit, with the exception of personal credit for education, healthcare and renewable energy, from 10 to 7 years in April 2020. In fact, the share of new personal credit with a maturity of over 7 years became residual thereafter.
Finally, the regular payments requirement continued to be met with a high degree of compliance with the Recommendation.
An analysis based on an economic model confirms the improvement in the borrowers’ risk profile when new credit was granted, through the reduction of the probability of default of borrowers and of the amount of credit losses to be borne by institutions in the event of default, as estimated by the model. This has a positive impact on financial institutions’ capital and on the banking system’s resilience to adverse shocks.