Having a home in Portugal can be an excellent investment, both financially and in terms of quality of life, but interest rates make a difference. When interest rates are low, your monthly payments are likely to be lower and you may be able to borrow more. But when interest rates are high, your monthly payments go up while your affordability goes down.
For most banks, interest rates for variable mortgages are calculated by taking the Euribor 3, 6, or 12 month rate and adding the bank’s spread. Euribor, or Euro Interbank Offered Rate, is the rate at which European banks borrow funds from one another.
As an example, if the Euribor rate is 3% and a bank’s spread is 1%, this means the mortgage interest rate will be 4%. If you have a variable rate mortgage, that figure can go up and down depending on the Euribor.
Use the form below to check how much interest rates would likely be for your property.
However, interest rates aren’t the only factor that determines how much your mortgage will cost you.
Your Deposit Makes A Difference
Firstly, the amounts that residents and non-residents need as a deposit differs.
- Residents: Typically need a deposit of around 20%, although this can be as low as 10%
- Non-residents: Typically need a deposit of around 30%, although this can be as low as 20%
Suppose you’re looking to purchase a property that costs €200,000.
- As a non-resident you would need a deposit of around 30%, which would be €60,000.
- As a resident, you would need a deposit of around 20%, which would be €40,000.
(A resident is someone who legally resides in Portugal. A non-resident is someone who legally resides outside of Portugal).
However, it isn’t just a case of putting down the minimum amount if you can afford to put down more. Mortgage interest rates vary depending on your LTV or loan-to-value. Someone who requires 80% from the bank will typically pay more than someone who only requires 50% from the bank, for example.
Of course, there’s an opportunity cost to consider. You could put down 50% as opposed to just 20%, which would likely mean that your interest rate is lower and so your monthly payments are lower. But that would mean that your money is tied up in the property. Could your money be better invested, whether that’s financially or for a better quality of life? Lower interest rates are important, but they’re not the only factor to consider.
The mortgage length makes a difference
When you get a mortgage, you can decide how quickly you’d like to pay it back. Some people choose to pay it back as quickly as possible, opting for home loans for just 10 years or even less, whereas others may take 40 years to pay a home loan off.
The longer you take to pay your mortgage off, the more your mortgage will cost you in the long run. However, the benefit is that your monthly repayments will be lower, which means you have more cash to spend on other things.
If the Euribor rate is currently high and you’re opting for a short-term mortgage, your interest rates will likely be high, regardless of whether you’re on a fixed or variable rate mortgage. This is because the bank estimates that the cost of loaning money will be higher in the short to medium term. However, economies are cyclical and if you have a longer term mortgage, interest rates are likely to be lower as the bank will assume there are periods in which borrowing will cost them less.
Fixed Rate Mortgages Offer More Certainty
It’s possible to fix your mortgage interest rate for a number of years (e.g. 5 or 10 years) or even the entire duration of the mortgage (although the latter is less common).
Fixed rates have their pros and cons. If interest rates drop, you end up paying more than if you were on a variable rate mortgage. However, if interest rates increase, you would save money.
If you think interest rates are likely to rise, it’s a good idea to fix. However, it’s worth noting that predicting interest rates changes is something that the banks are experts at and you’re unlikely to be able to beat them at their own game. One of the main reasons that people should consider fixing is if they value stability.