Why does the financing limit vary depending on the purpose of housing?
Currently, there are limits applied to housing credits, but they differ depending on the purpose given to the property. Why is there this differentiation? Read the explanation from the Bank of Portugal (BoP) below.
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What are the limits set 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, vary depending on the purpose given to the property.
In other words, the ratio between the amount of the housing 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 intended for own and permanent housing;
- 80% for credits for other purposes other than own and permanent housing;
- 100% for property acquisition loans held by institutions and real estate leasing contracts.
But why does the financing limit vary depending on the purpose of housing?
According to the BdP, different LTV limits are considered for different types of credit because "borrowers are more likely to prioritize compliance with obligations associated with home purchase or home equity loans, as they value the safeguard of their home" housing credit.
It should be noted 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 housing.
Furthermore, the increase in nonperforming loan levels in mortgage credit due to the financial crisis has led institutions to accumulate a significant volume of properties through deed in lieu of foreclosure. Therefore, by interfering with the institutions' business model, the less restrictive limit for financing property acquisition by the institutions aims to facilitate the reduction of non-performing assets on their balance sheets.
"In real estate financial leasing contracts, it is also justified to introduce a limit to the LTV ratio of 100%, since the legal ownership of the property remains with the institution until the end of the contract (there is no obligation for the financial lessee to purchase the property at the end of the contract)", explains the BdP.
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