Bank of Portugal tightens lending rules as families’ debt risks rise

Portugal’s central bank has tightened its macroprudential lending rules by lowering the recommended debt-service ratio for new loans while extending the maximum mortgage term for younger borrowers.

The reason for the change is that the Bank of Portugal is seeking to curb rising household indebtedness amid soaring house prices.

The announcement today is that the new rules will apply to consumer loans, including mortgages, where the borrower’s credit assessment takes place from August 1, 2026 onwards.

The most significant change reduces the recommended debt-service ratio — the proportion of a borrower’s income spent repaying debt — from 50% to 45%, including stress tests that assume a sharp rise in interest rates.

The central bank said the measure reflects growing concerns over rising borrowing levels as property prices and mortgage lending continue to accelerate.

At the same time, the bank has simplified mortgage maturity rules by allowing borrowers aged 35 or younger to take out home loans with terms of up to 40 years, while borrowers over 35 will face a maximum term of 35 years.

Previously, 40-year mortgages were limited to borrowers aged up to 30, with a maximum term of 37 years for those aged between 30 and 35.

According to the central bank, the simplified age bands will partly offset the impact of the stricter debt-service limit for younger homebuyers.

The previous recommendation that banks maintain an average mortgage maturity of 30 years has also been scrapped, although age-based maximum loan terms remain in force.

The revised debt-service limit applies to both mortgages and consumer credit.

The Bank of Portugal has also removed the special rule allowing banks to lend up to 100% of the value of properties they own. Those transactions will now be subject to the same loan-to-value (LTV) limits as all other property purchases.

In addition, financial leasing of residential property has been excluded from the scope of the macroprudential recommendation because it differs from conventional mortgages and represents only a small share of Portugal’s housing finance market.

The recommendations are not legally binding, but lenders must justify any cases where they exceed the prescribed limits.

That said, the central bank governor Álvaro Santos Pereira is already calling for the recommendations to become mandatory.

“It is time for macroprudential rules to become binding,” he said in May, arguing that many other European countries already give such measures legal force.

The changes come against a backdrop of rapidly rising house prices, continued growth in household lending and increasing average loan sizes, trends the central bank says point to higher levels of borrower indebtedness.

The Bankalso noted strong competition among mortgage lenders and a growing share of younger first-time buyers entering the housing market – many of whom have lower incomes and rely more heavily on borrowing to finance home purchases.

Source material: LUSA

Natasha Donn

Journalist for the Portugal Resident.