Mortgage instalments can be fixed at lower rate for two years from today

But borrowers will end up paying more over time

Holders of mortgage loans in Portugal can from today apply to join the scheme that fixes monthly instalments for two years at a lower rate than the current one.

This scheme is part of the measures approved by the government to mitigate the impact of the cost of home loans iwhich have been rising due to the increase in market interest rates (as most home loans in Portugal have a variable rate).

From today until the end of March 2024, existing borrowers can ask their lender for access to this mechanism, which covers variable-rate mortgages taken out up until March 15 this year, and which have a repayment period of more than five years.

The lender then has 15 days to respond, including with simulations of the regular instalment and the instalment with part of the amount deferred, the amount to be paid later, and the repayment plan for the amount to be deferred.

Customers will then have 30 days to inform their lender whether or not they want a fixed rate applied to instalments.

Lenders will not be able to charge commissions or fees for fixing the instalment, nor make its application conditional on contracting other products or services.

Those who take up this mechanism will pay a lower instalment for two years, as the instalment will be indexed to 70% of the average six-month Euribor for the month prior to the customer’s request – which guarantees that they will pay less during the two years than if the Euribor (European interbank rate, the basis for most mortgages in Portugal) were reflected at 100%.

After these two years, for the next four years, the instalment will return to normal, that is with the index at the time fully reflected

At the end of these four years, families will pay in the remaining instalments the amount that was not paid while they were benefiting from this reduction.

Alternatively, the deferred amount can be amortised in advance, without any commission or charge. 

Access to this mechanism also does not prevent customers from repaying the loan itself early (partially or totally) without penalty.

On Monday, in a notice on its Bank Customer Portal, the Bank of Portugal stressed that joining this scheme means that “the total amount of interest to be paid will always be higher.

Consumer rights association Deco, via its Proteste arm, carried out simulations for Lusa in which it quantifies the increase in the total amount paid for the loan if customers ask for access to instalment fixing.

A 30-year loan of €150,000, with a spread (the bank’s commercial margin) of 1.25 percentage points, indexed to the six-month Euribor, has a current instalment of €831.09; if the borrower takes advantage of the moratorium they will pay €722.28, that is €108.82 less per month.

So, over the two years that the instalment is fixed, they will pay €2,611.65 less. 

When their instalments return to normal, together with the deferred capital, the monthly instalment will be €850.87.

In total, Deco/Proteste calculates, the additional cost in interest on the total contract for a client with this credit who adheres to the moratorium is €3,082.13.

The simulation is based on the assumption that interest rates will remain at their current levels; if they fall the increase in total credit will be smaller and if they rise the increase will be greater.

It’s very useful for families with very high effort rates,” Deco/Proteste economist Nuno Rico told Lusa. “It’s like an opportunity cost of having immediate liquidity.”

However, he added that for borrowers who can afford the current instalment “it’s not worth joining this mechanism because it has an added cost in total.”

At the end of 2022, according to the Bank of Portugal, banks had around 1.5 million mortgage credit contracts in their portfolio (variable rate, fixed rate or mixed rate).