Banks tighten credit rules

in News · 26-07-2018 14:10:00 · 0 Comments
Banks tighten credit rules

Banks are imposing new rules for people applying for loans. According to reports this week, the new procedures, which came into force this month, see the criteria for applications become slightly more restrictive for both personal loans and mortgages.

The new rules for the granting of credit, which were announced in February and introduced on 1 July, see families’ spending on bank loans limited to half of their income.
Bank regulator Bank of Portugal (BdP) said the objective is to prevent banks from “taking excessive risks on new loans and for customers to have the ability to pay off debts”.
These limitations arose after the BdP admitted in the Financial Stability Report early in June that there are “some signs” of overestimating property prices, albeit limited.
For now, these rules are merely recommendations - although banks that do not comply with them will have to explain themselves - but in May, the Governor of the BdP, Carlos Costa, warned in Parliament that if banks do not respect them, they may go from being mere recommenda-tions to binding orders.
The new rules concern three types of limitations: effort rate limits, limits to the value of the loan against property given as collateral, and limits on the maturity of loans.

In its new guidelines, the BdP recommends allocating new credits only to customers who spend a maximum of half (50 percent) of their net income on the monthly instalments of all loans held, including mortgages and personal loans.
The banking supervisor can make exceptions; allowing customers to exceed this effort rate limit by up to five percent of the total amount of credit each bank grants per year, and that one-fifth of the total amount of loans granted each year may have an effort rate of 60 percent.
The regulator also recommends that the ratio between the value of the loan and the value of the property pledged as collateral should be limited to 90 percent for loans for permanent housing. That is, in these cases, the money borrowed for the purchase of a house can be at most 90 percent of the value of the property given as collateral.
This ratio is calculated based on the lower value of the purchase price of the house and the evaluation value of the house.
For loans with other purposes, the maximum to lend corresponds to 80 percent of the value of the property.
And lastly, the Bank of Portugal recommends a maximum of 40 years as a limit on the duration of the loan for new housing loan agreements and mortgage-backed credit. It also calls for gradual convergence to an average maturity of 30 years until the end of 2022. New consumer loans should last for a maximum of 10 years.
The daily average of credit lent by banks up until June was €4.7 million per day, although a new survey by the Bank of Portugal shows the number of loans being conceded is slowing.


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