LTV, DSTI and maturity limits
This measure is aimed at promoting the adoption of prudent credit standards on loans granted by the Portuguese financial system to consumers*, in order to enhance the resilience of the financial sector and the sustainability of households’ financing, thereby, minimizing defaults. Furthermore, Banco de Portugal aims at preventing excessive risk taking by the financial sector, in a context where less restrictive credit standards have been observed and this trend is expected to intensify.
This measure introduces:
- Limits to the loan-to-value ratio (LTV), i.e. the ratio between housing loan(s) and the minimum between the purchase price and the appraisal value of the house granted as collateral;
- Limits to the debt service-to-income ratio (DSTI); i.e. the ratio between monthly instalments of total credit agreements and the borrower’s income, net of taxes and contributions to social security;
- Limits to the maturity of loans;
- Requirement of regular payments of interest and capital.
The maximum limits introduced have an impact on loans to borrowers with a higher risk profile, without significantly affecting lending activity in general. The definition of limits with respect to these indicators is justified by their complementarity in signalling credit risks or losses and by their mutually reinforcing impact when applied simultaneously. Since the limits apply only to new credit agreements, its effect on the stock of credit will be gradual. The Recommendation follows the principle of comply or explain, implying that institutions should observe the limits introduced or justify any non-compliance. Banco de Portugal will assess the adequacy of the justification provided for the non-compliance and may eventually consider the introduction of additional, more binding, measures. Banco de Portugal will monitor the implementation of the Recommendation at least on an annual basis.
* Consumer is a person acting with no commercial or professional purpose concerning credit agreements subject to Decree-Law no. 133/2009 and Decree-Law no. 74-A/2017.
Summary of the macroprudential measure
This macroprudential measure is applicable to credit agreements concluded from 1 July 2018 onwards and includes all credit institutions and financial companies having their head office or branches in the Portuguese territory, authorised to grant this type of credits in Portugal.
In the context of the COVID-19 pandemic, Banco de Portugal has decided that personal credit with maturities of up to two years and duly identified as intended to mitigate households’ temporary liquidity shortage situations will no longer have to comply with a DSTI ratio limit and is also exempted from observing the recommendation of regular principal and interest payments. This measure applies to new personal credit granted from April 1 until September 30, 2020, date on which Banco de Portugal will reassess the adequacy of this change.