When applying for a housing loan several questions may arise, especially when we are talking about more technical terms. Most Portuguese people have difficulty knowing exactly what they mean, something that can generate doubts throughout the process.
At DECISIONS AND SOLUTIONS we can help you apply for credit to buy a house. This process is monitored by our team of professionals. However, we also want you to be a more informed and prepared consumer. In this sense, we decided to create a dictionary with some key terms.
1. Spread
In a very simple way, we can say that the spread is the profit that the bank will obtain when granting the mortgage loan. In other words, as Banco de Portugal states, it is one of the components of < b>interest rate.
There are several indicators that influence the definition of the spread by banking entities. Are they:
- Profile of those applying for credit and level of bank default risk;
- Loan amount;
- LTV Ratio(we will explain later);
- Contracting additional services: Many banks take advantage of mortgage loan applications to sell other services, in order to lower the spread. For example, insurance, credit cards or term deposits.
2. Indexing
If you have already applied for credit, you are familiar with the term Euribor. A short form of European Interbank Offered Rate, Euribor is nothing more than a reference value for interest rates at European level. The value is obtained through the average of rates in several banks in the euro zone, over a given period:
- 1 week;
- 1 month;
- 3 months;
- 6 months;
- 12 months.
The rate will only impact and cause changes in the provision of those consumers who opt for a variable rate credit. In Portugal, the most common Euribor rate for home loans is 6 months.
3. Nominal Annual Rate (TAN)
The TAN is the rate that calculates credit interest. It reflects the price at which financial entities lend money to their customers, without including taxes or any other charges.
4. Global Effective Annual Rate (APR)
The TAEG comes from the percentage of all transaction costs over the financed capital. Interest amounts and reimbursement collection costs are included, as well as other mandatory charges to be borne such as commissions, taxes and insurance.
5. MTIC
The acronym MTIC refers to the Total Amount Imputed to the Consumer. In other words, these are the expenses associated with applying for a mortgage loan. Includes:
- Total loan amount;
- Interest;
- Commissions;
- Taxes;
- Other associated costs.
This value can be important when making a comparison between the different proposals from banking entities for your home loan. Through it, you know exactly how much you will pay when repaying your credit. However, this value assumes that there is no change in the conditions of the loan throughout its repayment period, which, for example, when we are using the repayment modality strong>variable interest rate, does not happen, as we will have reviews of the index used at the end of each period of its validity.
On the other hand, the MTIC indicated in the European standard information sheet (FINE) reports to the application of the base interest rate and not the application of the contracted interest rate which, in principle, will be the one that the borrower will actually bear. We should also mention that the MTIC indicated in FINE assumes that the client will hire the life insurance and property in the bank itself, which may not happen, without penalty of interest rate conditions.
6. Effort Ratio/DSTI (Debt Service to Income)
The Effort Rate/DSTI and the Loan-To-Value (LTV) are the two variables that contribute most to the approval or denial of a home loan.
The much talked about Effort Rate is nothing more than a measure of the debt capacity of customers to assume the debt service of a home loan. It is expressed as a percentage and results from the ratio between all responsibilities assumed and/or to be assumed by the bank customer and their net monthly income.
With a view to guarding against possible interest rate rises, in a situation in which the index used in these credit operations – Euribor – assumes particularly low values, negative since the end of 2015, When the variable interest rate regime is used, Banco de Portugal recommends that banking institutions calculate the impact of an additional 1% (terms of up to 5 years), 2% (between 5 and 10 years) or 3% (terms greater than 10 years) in the installments that customers will assume.
Banco de Portugal recommends that, after calculating the aforementioned impact, the ratio between the customer’s liabilities and their net income should be up to 50%.
7. LTV (Loan-To-Value) Ratio
It is expressed as a percentage and results from the ratio between the amount financed for your home loan and the value of the property given as collateral. This amount cannot exceed the lesser of two values:
- Acquisition;
- Scripture.
- Maximum LTV’s:
- New housing loans intended for the acquisition or construction of permanent housing: 90%.
- New housing loans, loans with mortgage guaranteeor equivalent intended for other purposes: 80%.
- New housing loans, loans with equivalent mortgage guarantee for the acquisition of properties held by the credit institutions themselves or real estate financial leasing contracts: 100%.
8. Variable rate
It results from the addition of the Euribor index with the spread. The spread will remain unchanged throughout the duration of your home loan, as long as all initial contractual conditions are met. However, the index will be reviewed according to its frequency, normally 3, 6 or 12 months, which may result in an increase or decrease in the interest rate to be applied and, consequently, the installment.
9. Fixed Rate
This type of interest rate will remain unchanged during the contracted fixed rate period, which could be the entire loan term of your home loan. At this point, it is now possible to contract a fixed interest rate regime for the entire duration of the loan (maximum 40 years).
The fixed interest rate, like the indexed one, is formed by a reference rate defined by the bank based on the rate at which it can be financed in the market for the period of fixing the desired rate, plus, as in the variable rate, the spread, according to the risk assessed for the client and the credit operation.
10. Municipal Tax on Onerous Property Transfers (IMT)
The tax relating to the transfer of the property is paid to the State, which is calculated on the higher of two values: the acquisition value or the tax asset value.
Its amount varies according to the purpose and type of property. When it comes to your own permanent home, you may be exempt up to a certain amount.
At DECISIONS AND SOLUTIONS, we help you understand if you fall within these exceptions.
11. Stamp Duty
When your home loan becomes available, you will have to pay Stamp Tax on:
- Acquisition: 8% of the acquisition value or the tax asset value (whichever is higher);
- The amount of credit:
- 0.5% if the term is up to 5 years;
- 0.6% if the term is longer than 5 years.
12. Municipal Property Tax (IMI)
This tax is defined by local authorities and is levied on the tax asset value of the property. It is paid annually and calculated on December 31st. Depending on the type of property, a different rate is applied. Like this:
- In urban buildings a rate between 0.3% and 0.45% is applied;
- In rural buildings the rate of 0.8% is applied.
Families with a gross annual income up to €15,295, whose tax asset value (VPT) of the set of buildings they own does not exceed €66,500, are exempt from paying the IMI. As long as these conditions are maintained, the exemption is permanent and automatically granted by Finance. Anyone who buys a property for their own permanent home can also benefit from IMI exemption in the first three years. However, the house (apartment or villa) must have a tax asset value equal to or less than €125,000 and the family’s annual taxable income must not be higher at €153,300.
Ask for your home loan with the help of DECISÕES E SOLUÇÕES
To help you find the best home loan solution, you can visit one of the stores in our network. We have more than 100 stores across the country and more than 350,000 customers. Visit the nearest store or contact us.
Decisões e Soluções – Credit Intermediaries, Lda, registered with the Bank of Portugal, as a Linked Credit Intermediary, under no. 926, verifiable at www.bportugal.pt/intermediarios -credito is a mediator registered with the ASF, since 29 September 2009, with the category of Insurance Agent, under no. 409311648/3, with authorization for Life and Non-Life, verifiable at www.asf.com.pt. The insurance intermediary does not assume risk coverage. Decisions and Solutions – Mediação Imobiliária, Lda, holder of AMI License No. 9300 issued by IMPIC, I.P.
