Why does the financing limit differ depending on the purpose of housing?

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What are the limits stipulated for housing financing?

The limits on housing financing by banks, resulting from the macroprudential measure of the Bank of Portugal (BdP) in force since 2018, differ depending on the purpose given to the property.

In other words, the ratio between the amount of the home loan, with mortgage guarantee or equivalent, and the value of the property serving as collateral - Loan-to-value (LTV) - is limited to:

• 90% for credits for own and permanent housing;  
• 80% for credits for purposes other than own and permanent housing;  
• 100% for real estate acquisition credits held by institutions and real estate leasing contracts. 

But why does the financing limit differ depending on the purpose of the housing?  

According to the BdP, different LTV limits are considered for different types of credit because "borrowers are more likely to prioritize fulfilling obligations associated with contracts for home acquisition credit or those secured by their own or permanent housing, as they value safeguarding their home".

It is worth mentioning that international experience also points to different and even more restrictive limits, in the case of purposes other than the acquisition of one's own permanent home.

In addition, it is due to the increase in non-compliance levels of housing credit resulting from the financial crisis, which led institutions to accumulate a significant volume of properties in lieu of non-compliance. Therefore, by interfering with the business model of institutions, the less restrictive limit for financing the acquisition of properties by institutions aims to facilitate the reduction of non-performing assets on their balance sheets.

"In financial real estate leasing contracts, the introduction of a 100% LTV ratio limit is also justified, since the legal ownership of the property remains with the institution until the end of the contract (the financial tenant is not required to purchase the asset at the end of the contract)", as explained by the BdP.

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