The Portugal government has given banks a mandate to apply a 30% reduction to the six-month Euribor rate when calculating mortgage interest rates. This move is critical, as a staggering 90% of Portugal's 1.4 million mortgages are tied to variable rates linked to Euribor, the highest in the euro zone. This measure is aimed at capping mortgage interest rates at 70% of the six-month Euribor rate for the next two years. The recovery of unpaid interest will be initiated by banks after four years. This initiative, combined with existing government interest subsidies for highly indebted families, is expected to assist around one million households, providing stability amid rising mortgage payments and inflation concerns.
Last week, Portugal's government announced that, in response to borrowers facing challenges with rising interest rates and the risk of default, banks will be required to apply a 30% reduction to the standard six-month Euribor rate when calculating mortgage interest rates. This move comes as around 90% of Portugal's 1.4 million mortgages are tied to variable rates linked to Euribor, making it one of the highest levels in the euro zone. However, with interbank rates surging due to the European Central Bank's increase in interest rates from historically low levels, this measure aims to provide relief to borrowers.
Finance Minister Fernando Medina explained during a press conference that due to this action, the effective interest rate on mortgages is capped at 70% of the six-month Euribor rate for the coming two years. Additionally, individuals with mortgages linked to the three-month and twelve-month Euribor rates will benefit from a reduction corresponding to the decrease applied to the six-month rate.
Banks can initiate the recovery of unpaid interest from those who requested the reduction after a span of four years by redistributing the payments until the mortgages reach their maturity.
Medina stated that this new measure, coupled with the interest subsidy already provided by the government to highly indebted families, is expected to offer assistance to approximately one million households. He emphasized that the sharp increase in mortgage payments, alongside the impact of inflation, is currently the most pressing issue faced by Portuguese families. The aim is to provide these families with stability over the course of two years.
Bank of Portugal's Mario Centeno has recently estimated that by the end of 2023, the mortgage expenses for roughly 70,000 families could surpass 50% of their net income. Medina noted that the recently implemented measure, aimed at preventing non-performing loans (NPLs), was collaboratively agreed upon with the Association of Portuguese Banks (APB) and the central bank.
Following the economic and debt crisis of 2010-13, Portuguese banks experienced a significant increase in bad loans. However, they have since successfully lowered the percentage of non-performing loans to 3.1% of the overall credit, down from a high of 17.9% in mid-2016.
In conclusion, Portugal's decision to mandate a 30% reduction in the six-month Euribor rate for mortgage interest calculations is a timely and significant step towards alleviating the financial burden on its citizens. With a vast majority of mortgages in the country tied to variable rates linked to Euribor, this measure is poised to provide essential relief to countless households grappling with the adverse effects of rising interest rates. The collaboration between the government, the Association of Portuguese Banks, and the central bank in implementing this measure is commendable, aiming not only to provide stability but also to prevent the resurgence of non-performing loans. As Portugal continues its path of economic recovery and financial stability, this action represents a significant stride toward safeguarding the financial well-being of its citizens and ensuring the sustainability of its banking sector.
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