Need a Mortgage?
If you have been reading along for a while you know we are very conservative when it comes to our finances. We are not Dave Ramsey conservative…but we haven’t had a mortgage in 20+ years, buy our cars for cash unless it is a 0% loan, etc. So we paid cash for the building we bought and will be paying cash for the renovations from the proceeds of the home we sold in California. At the same time, we realize not everyone is able to do this.
When Money Looks Cheap
Of course, there is also the fact that recently home mortgage rates have been historically low. Both Denise and I (separately) purchased houses when Reagan was in office … 14 -16% … not so fond memories. And I will admit that when we were living in Cascais, I considered upping our house budget by taking out a mortgage. But in Portugal mortgages work differently than in the US. In Portugal, typically a mortgage will not extend beyond the age of 70 … i.e. the mortgage must be paid in full when the oldest member of the couple reaches 70.
So let’s say we had upped our budget to 1 million euros, and put down a 75% deposit. Since at the time I was 67, we would have had only a 3-year term. 250,000€ at 2.5% interest over only 36 months is a whopping 7215€/month. Yikes! Compare this to the States where 67-year-olds can get 30-year mortgages. On that same amount, the monthly payment would be less than $1000/month.
Is this a Portuguese thing?
As I was writing this post I did some research…yes, I love my Google machine and my readers. Age limits are not unique to Portugal. In fact, not having age limits seems to be a North American thing (specifically, the US and Canada).
In the U.K. you can’t apply for a mortgage after 70 and it must be paid in full by 85. (Some banks limit it further.)
In France and Spain, your mortgage must be paid in full by age 75.
In Germany, your mortgage must be paid by age 80.
Given Portuguese life expectancy you may think 70 is a bit “young”, and in fact, there has been talk of extending the normal term to age 75. However, today the limit is 70 and many would say such limits just make sense! (Please note, the term of a mortgage for younger people recently changed in Portugal. If you want to learn more, click here.)
“Senior” Lending
So what should you expect if you want to borrow money to purchase your home in Portugal?
First, expect to need at least a 20% deposit. Some lenders will require more.
Second, remember the term will be limited to age 70 of the older member of the couple.
Third, consider how much annual income you can prove. That’s social security, rental income, pensions, automatic monthly IRA withdrawals, work income, etc.
Divide that amount by 14.
Next, divide the result by 2. [i.e. (Annual income/14)/2]
Finally, deduct any other loans (e.g. a car loan) from that amount. The result will be the maximum monthly payment you will likely be allowed. (Essentially, lenders will not want you to borrow more than 35% of your monthly income.)
Let’s take an example of a couple who are 62 and 63. They wish to buy a 250,000€ apartment and have an annual income of 56,000€/year.
56,000 / 14 = 4000€
4000 / 2 = 2000€
2000 - 150 (car loan) = 1850€
As the term of their mortgage will be only 7 years, the most they will likely be able to borrow is 140,000€ … meaning they will need to make a downpayment of 110,000€ to purchase the apartment. (Also, note there are increased costs associated with taking a mortgage. You can learn more about them here.)
And no, I have not been doing this math in my head. If you want to run some simulations you can do so using a free amortization calculator.
One final note. I meet many people that are unpleasantly surprised by the cost of real estate in Portugal. Yes, it is cheaper than the U.S., Canada, and most of Europe … but perhaps not as cheap as you read in International Living magazine. Also, most Americans are accustomed to buying detached homes rather than apartments … which can be harder to find and/or pricier. So if you are a few years from the big move, consider paying down your mortgage by adding to your monthly payment. Just one woman’s opinion…
Editors’ Update: Several have commented that the age is now 75. Please note, banks have discretion and in fact, may extend the age. Americans and other expats may have higher incomes and more net worth than many Portuguese borrowers and this may be considered when making such decisions. If you use 70 as a “rule of thumb” you may be pleasantly surprised when you contact a lender. The important thing to realize is that, unlike North America, you will not be offered a 30-year mortgage if you are in your 60s.
Nancy: In preparing for eventual residency, I've seen almost every YT video on PT. None ever mentioned this - so a big thanks. Retired at 67 soon and not asset-rich, I'll stop looking at possible apartments to buy (150K @ 8 years is ~$1800/mo). However, I might con one of my working kids to invest and just pay them rent! Thanks again.
A few additional notes: (1) Our bank offered us a mortgage that would cover us until we were 75; (2) however, we would also both be required to buy life insurance for the bank’s benefit; (3) we would also be required to buy insurance on the building for the bank’s benefit, and for an apartment in a larger building, the insurance covers the apartment as well as the percentage of the building that the apartment occupies. We were quoted an extremely low rate - only 1% above euribor, which is currently negative - BUT this was a floating rate, which is apparently the most common way of financing by far in Portugal. The only thing that our bank could offer that was close to a fixed rate was essentially a 10/1 ARM, and the base rate was a few percent higher. Bottom line: with the insurances (for middle aged folks) and fees included, the cheapest floating rate mortgage was equivalent to about 4-4.5% interest, and the 10/1 ARM analog started out at an equivalent to about 6-6.5% interest.