Banco de Portugal applies macroprudential measures to new credit agreements for consumers
As macroprudential authority and by deliberation of the Board of Directors of Banco de Portugal of 30 January 2018, Banco de Portugal has approved a recommendation introducing limits to some of the criteria used in the assessment of customers' creditworthiness, covering the granting of new credit relating to residential immovable property, credit secured by a mortgage or equivalent guarantee, and consumer credit agreements.
This macroprudential measure applies to agreements concluded as of 1 July 2018 and covers all credit institutions and financial companies that have their head office or a branch in Portuguese territory and are authorised to grant this type of credit in Portugal.
Three types of limits are established:
- to the ratio between the loan amount and the value of the property pledged as collateral (LTV – loan-to-value):
- of 90% for credit for own and permanent residence;
- of 80% for credit for purposes other than own and permanent residence;
- of 100% for credit for purchasing immovable property held by the credit institutions and for property financial leasing agreements.
- of 50% to the ratio between the monthly instalment amount calculated with all the borrower's loans and his/her income (DSTI – debt service-to-income), with the following exceptions:
- up to 20% of the total amount of credit granted under this measure by each institution in each year may be granted to borrowers with a DSTI of up to 60%;
- up to 5% of the total amount of credit granted under this measure by each institution in each year may exceed the limits laid down regarding the DSTI.
To calculate the DSTI, new credit agreement’s monthly instalments 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 borrower’s income 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:
- of 40 years for new agreements for credit relating to residential immovable property or credit secured by a mortgage or equivalent guarantee, and gradual convergence towards an average maturity of 30 years by the end of 2022;
- of 10 years for new consumer credit agreements.
The limits applying to the LTV and DSTI ratios and to the maturity must all be observed simultaneously.
The limits now introduced correspond to caps and as such do not replace these institutions' mandatory assessment of the adequacy of the levels of the different indicators and other criteria used in the assessment of each borrower's creditworthiness.
The macroprudential measure also establishes that the credit agreements must have regular principal and interest payments.
In a context favouring the further easing of credit standards, with interest rates at record lows, the economy recovering and house prices rising, Banco de Portugal aims to ensure through this measure that the credit institutions and financial companies do not take on excessive risks in granting new loans and that borrowers have access to sustainable financing.
The measure is adopted by Banco de Portugal in the form of a Recommendation, based on the "comply or explain" principle. The credit institutions targeted must respect the limits applied; otherwise they must justify their non-compliance. Banco de Portugal will assess the adequacy of the justifications presented by the credit institutions.
Recommendation within the legal framework of credit agreements for consumers*
(applying to agreements concluded from 1 July 2018)
* 'Consumer' means a natural person who acts for purposes other than those of his or her commercial or professional activity in the credit agreements covered by the provisions of Decree-Law No 133/2009 and Decree-Law No 74-A/2017.
This Recommendation does not cover:
- overrunning; 
- credit agreements intended to prevent or address arrears situations;
- changes in the terms and conditions of credit agreements concluded before 1 July 2018;
- credit agreements for an amount equal to or lower than the equivalent to tenfold the guaranteed monthly minimum wage;
- credit agreements in the form of an overdraft facility and other credit with no defined repayment schedule (including credit cards and credit lines);
- credit agreements concluded under the framework for granting subsidised housing credit for the disabled.
Banco de Portugal will nevertheless monitor the developments of credit agreements concluded with consumers not covered by this Recommendation.
The measure has been submitted for consultation to Associação Portuguesa de Leasing, Factoring e Renting (ALF), Associação Portuguesa de Bancos (APB), Associação de Instituições de Crédito Especializado (ASFAC) and Associação Portuguesa para a Defesa do Consumidor (DECO). In addition, the National Council of Financial Supervisors, under Article 2 (3) (c) of Decree-Law No 143/2013 of 18 October 2013 was consulted.
Banco de Portugal will monitor the implementation of this measure at least once a year.
 ‘Overrunning’ means an overdraft tacitly accepted by the creditor, allowing a consumer access to funds which exceed the balance in the consumer's deposit account or the agreed overdraft facility.