Before granting a loan, or increasing the total amount of a loan already contracted, the credit institution must assess the ability of bank customers to fulfil the obligations they intend to take on, i.e. it must assess their creditworthiness.
The duty to assess the creditworthiness is applicable in the granting of:
agreements for credit relating to residential immovable property and credit secured by a mortgage or equivalent guarantee, regulated by Decree-Law No. 74-A/2017, of 23 June;
consumer credit agreements, regulated by Decree-Law No. 133/2009, of 2 June, with the exception of credit overdrafts.
Elements taken into account in the creditworthiness assessment
When assessing the creditworthiness of bank customers, institutions should take into consideration the following elements, inter alia:
Age;
Professional situation;
Regular income and expenses;
Information contained in databases on credit liability – such as, Banco de Portugal’s Central Credit Register;
Future circ*mstances that may have a negative impact on the customers’ ability to comply with the credit agreement.
Credit institutions should consider the impact on the bank customer’s ability to meet the obligations arising from the credit agreement of:
A possible reduction in their income level after retirement age or the end of the employment agreement, if the credit agreement is in force beyond that time;
A potential increase in expenses arising from the need to ensure the payment of other debts of which they are guarantor;
A possible increase in the amount of the instalment resulting from the increase in the interest rate on credit agreements with variable or mixed interest rates (credit agreements that provide for a fixed-rate period followed by a variable-rate period);
Changes in the amount of instalments payable under credit agreements in which the parties agree on grace periods for the payment of interest or principal or the deferral of payment of part of the capital to the end of the agreement.
How is the bank customer’s income determined for the purpose of assessing creditworthiness?
The assessment of creditworthiness should preferably be based on the income received by the bank customers on a regular basis (such as income earned as salary, remuneration for the provision of services or social benefits).
The credit institution must take into account the income earned for at least the three months prior to the time it assesses the creditworthiness and should not assume an increase in the future income of the bank customer.
In the case of loans of less than ten national minimum wages or a temporary increase (for a period of less than three months) of the total amount of the loan, institutions may use indirect methods to assess the creditworthiness of customers. In other words, in these cases institutions can assess the creditworthiness of bank customers based on an estimate of their income level, based on sufficient information to that effect.
How are the bank customer’s regular expenses determined for the purpose of assessing creditworthiness?
In assessing the creditworthiness of bank customers, the institution should consider a reasonable and prudent amount for their regular expenses, and should not assume a future reduction of these expenses.
When determining these expenses, the institution shall consider expenses of a personal and family nature as well as charges associated with the fulfilment of obligations arising from the credit agreement under consideration and the obligations assumed under other credit agreements.
In the case of loans of less than ten national minimum wages or a temporary increase (for a period of less than three months) of the total amount of the loan, institutions may use indirect methods to assess the creditworthiness of consumers. In other words, in these cases institutions can assess the creditworthiness of bank customers based on an estimate of their level of expenditure, based on sufficient information for that purpose and the information contained in databases of credit liabilities.
Customers must provide the information deemed necessary by the credit institution for the assessment of their creditworthiness as well as the documents required to prove the veracity and timeliness of this information.
For example, the institution may request the submission of documents proving the income earned by bank customers in the last three months, as well as information about their regular expenses.
If customers do not provide the information requested by the credit institution, fail to submit the documents or provide false or outdated information, the credit institution will not grant the loan or, if applicable, will not allow the loan amount to be increased.
Credit limits
New credit agreements should comply with limits related to the value of the property, the customer’s debt service rate, the maturity of loans and the repayment method set by Banco de Portugal. The limits should all be observed simultaneously and correspond to caps. As such, they do not replace the assessment of each borrower's creditworthiness.
LTV Ratio – ratio of the loan amount to the value of the property pledged as collateral (loan-to-value ratio)
The loan amount should not exceed a certain percentage of the value of the mortgaged property. The value of the property corresponds to the minimum between the purchase price and the appraisal value of the property.
Therefore, the amount of the credit agreement should not exceed:
90% of the value of the property (i.e. 90% of the purchase price or the appraisal value, wichever is lower), for credit for own and permanent residence;
80% of the value of the property, for credit for purposes other than own and permanent residence;
100% of the value of the property, for credit for purchasing immovable property held by the credit institutions and for property financial leasing agreements.
DSTI Ratio – ratio of the total amount of monthly instalments of a borrower’s total debt to his/her monthly income (debt service-to-income ratio)
The total amount of monthly instalments of the borrowers’ loans, including the instalment of the loan they intend to enter into and the instalments of other loans they have entered into, should not as a rule exceed half (50%) of their income, less taxes and social security contributions.
Maturity of loans
Agreements for credit relating to residential immovable property and credit secured by a mortgage or equivalent guarantee should not, as a rule, have an average maturity longer than 30 years. The maximum maturity of these contracts may not exceed:
- 40 years for borrowers aged 30 or under;
- 37 years for borrowers aged over 30 and up to and including 35;
- 35 years for borrowers aged over 35.
Personal credit agreements should not have a maturity longer than seven years. Exceptions are made for credit for education, health and renewable energy, whose maximum maturity is 10 years, provided that these purposes are duly evidenced.
Car credit agreements should not have a maturity longer than 10 years.
Loan repayment method
New credit agreements should have regular principal and interest payments, and thus not provide grace periods.
These limits do not apply where the agreement is intended to prevent or settle arrears situations (for example, through consolidation or refinancing of agreements). The limits also do not apply to revolving credit agreements, such as credit cards, credit lines and overdraft facilities, nor to credit agreements with an amount equal to or lower than the equivalent to tenfold the guaranteed monthly minimum wage.
Consequences of the creditworthiness assessment
Institutions should only grant the loan – or, if applicable, increase the total loan amount – if the result of the creditworthiness assessment indicates that the bank customer is likely to comply with the obligations arising from the credit agreement.
If the loan or the increase in the total loan amount is refused on the basis of the creditworthiness assessment, the institution must inform the bank customer accordingly, without undue delay.
The institution is only obliged to inform the customer of the reasons for the refusal of the loan when this is motivated by the information that the institution consulted about the customer in the credit liability databases.
Even if the outcome of the creditworthiness assessment is positive, the credit institution is not obliged to grant the loan or increase the total loan amount.
