Everything you need to know about Mortgage Credit

Mortgage credit is one of the most common forms of financing for those looking to buy a property or secure a loan using an asset as collateral. This type of credit offers additional security for both the borrower and the bank, and can be used for a variety of purposes in addition to buying a home, such as property renovation or debt consolidation.

In this article, we’ll explain in detail how mortgages work, what their benefits and risks are, and what you should consider before applying for one.

What is a mortgage?

Mortgage credit is a type of loan in which the client offers an asset, usually a property, as a guarantee of payment. This property can be your own or that of a third party (provided they authorise it). If there is a default, the bank can foreclose, i.e. sell the property to recover the value of the loan.

This type of loan is often used to buy property, but it can also be used for other purposes, such as financing work, buying furniture or consolidating several loans into one with more favourable payment terms.

Types of mortgage credit

1. Home loan: This is the most common, used to purchase property. The property itself serves as collateral and the bank can foreclose in the event of default.
2. Related credit: also called multi-risk credit, this modality uses an existing mortgage credit to obtain additional financing, usually for building work or the purchase of furniture.
3. Consolidated Credit: this type of credit makes it possible to combine several credits into a single one, using a property as collateral, which usually results in a lower monthly instalment and more favourable conditions.

Requirements and process

Applying for a mortgage involves meeting several requirements. The main ones are:

• Loan-to-Value (LTV): The percentage of the loan amount in relation to the value of the property. In Portugal, the Bank of Portugal recommends an LTV of up to 80 per cent, which means that the bank finances up to 80 per cent of the value of the house, with the rest being paid by the buyer.
• DSTI (Debt Service-to-Income): The percentage of the customer’s disposable income that can be earmarked for paying off loans. In 2023, the Bank of Portugal recommends that the DSTI does not exceed 50 per cent, although it can go up to 60 per cent in some special cases.
• Property valuation: The bank carries out a valuation of the property offered as collateral to ensure that its value is sufficient to cover the amount of the loan. This valuation is important in determining the amount of credit to be granted.

Interest rates and payment conditions

One of the main benefits of mortgage credit is that, because it involves a real guarantee, interest rates are generally lower than for other types of credit. In addition, the repayment periods are usually longer, which makes the monthly instalments more affordable.
However, you should be aware of interest rate fluctuations, especially if you opt for a variable rate. The Euribor rate, which serves as a benchmark for many loans, has fluctuated in recent years and can have an impact on the amount of your monthly instalments.
To minimise this risk, many customers have opted for loans with a mixed rate, where part of the loan is fixed and the other variable, or a full fixed rate, which guarantees constant payments over the term.

Risks associated with mortgage credit

Although mortgages offer significant advantages, they also come with risks. The main risk is the possibility of losing the property. If the customer is unable to meet the payments, the bank has the right to foreclose, i.e. sell the property to pay off the debt.
In addition, default can have an impact on the customer’s credit history, making future loan applications difficult. Another factor to consider is the risk to third parties if the mortgaged property belongs to someone else.

How do you choose the best mortgage?

Before deciding to take out a mortgage, it’s essential to compare offers from different banks. Conditions vary between institutions and you may find significant differences in interest rates, payment terms and other charges.

In addition, make a careful analysis of your financial situation to ensure that you will be able to fulfil the credit obligations without compromising your budget.

Conclusion

Mortgage credit is an effective solution for those who need finance, whether to buy a property or for other purposes. However, it’s important to carefully weigh up the benefits and risks before going ahead. Make sure you understand all the conditions of the contract and that you choose a solution that suits your needs and financial capacity.

The information in this article does not constitute any personalised recommendation and does not dispense with consulting official and legal entities for an informed decision.