Portuguese Government will allow for loan restructuring due to increasing interest rates
On November 3rd, 2022, the Portuguese Government approved new measures to monitor and mitigate the impact of rising interest rates on monthly mortgage loan repayments, which are usually based on a variable rate arrangement. It’s expected the measures will enter into force in December 2022.
The objective of this Decree-Law will be to make it possible for families with stressing effort rates to renegotiate their mortgage loans without suffering penalties and commissions.
Banks will have 45 days to review their mortgage portfolios that show an increase in the effort rate and may be at risk of default.
The evaluation and renegotiation of the agreements under the new measures will apply to loans up to 300.000,00 euros and:
- If the effort rate is equal to or greater than 50%;
- If the debt service ratio is equal to or higher than 36% and the debt service ratio has increased more than five percentage points
- If the effort rate is equal or superior to 36% and has registered an increase of three percentage points in the interest rate.
According to the diploma, clients can take the initiative to approach Banks and other financial institutions if they face degradation of their financial capacity. Banks shall present solutions to reduce monthly instalments without increasing the interest rates whenever they detect a significant worsening of the customer’s effort leading to default or if the thresholds defined by the Government are being met.
Banks can propose to lower the instalment of the mortgage loan by:
- extending the term of the contract,
- temporarily reducing the interest rate,
- introducing payment of interest only,
- renegotiating the agreement, or consolidating loans,
so as long as the solution presented does not increase the interest rate spread.
An essential point of this new law is that all renegotiation of contracts carried out under this decree-law will result in the application of the action plan for default risk (PARI). Therefore, the credit institution must inform the Bank of Portugal if the credit has been restructured, and with this, the borrower will be deemed a “client at risk”.
Customers may face the consequences of obtaining other loans because the reporting of increased risk will negatively impact their credit score. For instance, one possible immediate consequence is to have all credit cards cancelled. It is a preventive measure taken by the Bank of Portugal to avoid the creation of new credits for those in a vulnerable financial situation.
The new measures announced by the Portuguese Government have yet to be implemented and fine-tuned, and one must wait for the final version of the Decree-Law to better assess its impact.
The forms of renegotiation and extension of deadlines are still to be defined, and the deadlines and limits in the case of extension of the deadline still need to be determined.
The signaling of the Bank of Portugal as a client at risk will negatively impact families when seeking future loans.
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