How to enter into home loan agreements

Bank customers must follow a set of administrative procedures before submitting the loan application to the credit institution (see the Casa Pronta website of the Ministry of Justice).

Bank customers are entitled to obtain clear and complete information about all the characteristics, conditions and costs of the loan before, when entering into the agreement and during the agreement.

 

Pre-contractual information

Before entering into home loan or other mortgage loan agreements, bank customers are entitled to be informed clearly and completely about all the loan conditions so that they can properly compare the various offers and make an informed decision.

Credit institutions and, where applicable, tied credit intermediaries must provide bank customer with general information on the main characteristics of the loans marketed.

This information should be made available:

  • Permanently on the websites of the credit institutions and, where appropriate, of tied credit intermediaries;

  • On paper or other durable medium, at the request of bank customers at the branches of credit institutions and, where applicable, tied credit intermediaries.

Credit institutions and, where appropriate, credit intermediaries, must provide bank customers with personalised pre-contractual information through the European standardised information sheet (ESIS).

The ESIS must be made available to bank customers by the credit institution or, where appropriate, the credit intermediary, when simulating a loan. The simulation can be done at the branches of credit institutions or credit intermediaries, through their websites or through any other means of distance communication. When communicating the approval of the loan, credit institutions should give customers a new ESIS with the approved loan conditions.

The ESIS has a unique and standard format and consists of two parts – A and B (Instruction No. 19/2017):

Part A of the ESIS presents:

  • Data identifying the lender

  • Data identifying credit intermediary

  • Main features of the loan:

    • Amount and currency of the loan to be granted;

    • Duration of the loan;

    • Type of loan;

    • Type of interest rate;

    • Total amount to be reimbursed;

    • Guarantees required.

  • interest rate and other costs:

    • Annual percentage rate of charge;

    • Interest rate and its decomposition (fixed rate, reference rate, spread);

    • Other components of the annual percentage rate of charge, such as fees, expenses, insurance required and other costs.

  • Frequency and number of payments

  • Amount of each instalment

  • Illustrative repayment table

  • Additional obligations

  • Early repayment

  • Flexible features

  • Other rights of the borrower

  • Compliants

  • Non-compliance with the commitments linked to the loan: consequences for the borrower:

    • Interest rate on arrears and the respective rules of application;

    • Other charges;

    • Consequences of non-payment.

  • Additional Information

  • Supervisior

Part B of the ESIS provides information on:

  • Cross-selling

  • Special guarantee scheme

  • Other situations that may affect the cost of the loan

  • Other information

  • Required documentation

  • Repayment tables

If the customer intends to take out a loan in foreign currency, which entails specific risks for the bank customer, during the pre-contractual stage the credit institution must propose:

  • if applicable, entering into a euro loan for the same purposes as the loan in foreign currency;

  • the autonomous contracting of financial instruments available in the market to limit exchange risk.

If a financial instrument is not contracted to limit exchange rate risk, a credit institution or credit intermediary must include an example of a strong fluctuation of the national currency in the loan instalments in the ESIS, as well as the impact of a strong fluctuation of the national currency, coupled with an increase in the interest rate of the loan in foreign currency, on the loan installments.

 

Duty to provide assistance

Before signing the home loan or other mortgage loan agreement, the credit institution and, where appropriate, the credit intermediary should enlighten bank customers so that they can assess whether the proposed credit agreement and any ancillary services are appropriate to their financial situation and needs.

Thus, the credit institution and, where appropriate, the credit intermediary should, in particular:

  • Explain to bank customer the contents of the European standardised information sheet (ESIS), the draft loan agreement and the documents attached to the ESIS;

  • Explain the main features of the proposed credit agreement and any ancillary services;

  • Describe their specific effects for the bank customer, including the consequences of their failure to pay;

  • Answer the questions posed by bank customers.

Where pre-contractual information is provided by means of distance communication, the credit institution and, where appropriate, the credit intermediary should provide dedicated customer service lines and specific audio, video or written content adapted to the means of communication used for the provision of pre-contractual information.

 

Cross-selling

The credit institution may not make the granting or renegotiation of a home loan or other mortgage loan subject to the contracting of other products or services (i.e. tying is prohibited in Portugal). However, there are some exceptions to this prohibition. Thus, the credit institution may require bank customers to:

  • Open or maintain a current account;

  • Enter into one or more appropriate insurance agreements related to the credit agreement. In that case, the credit institution must accept the insurance agreement of any provider if that agreement offers a level of guarantee equivalent to that of the insurance agreement proposed by the credit institution.

The credit institution may propose to bank customers the optional acquisition of other financial products or services as compensation to reduce the costs of the credit agreement (i.e. in Portugal, bundling is allowed).

In the case of an optional purchase of other financial products or services together with the loan, the european standardised information sheet (ESIS) provided to bank customers must:

  • Identify the products and services linked to the loan;

  • Explain the financial effects produced on the loan as a result of the acquisition of these products or services;

  • Describe the impact of subsequent changes to the products and services linked to the loan, namely with regard to the instalment amount, the impact on the spread and the updating of the applicable interest rate.

If customers cease to subscribe or maintain one or more of the financial products or services they acquired to benefit, for example, from a reduction in the spread, the institution may increase the credit spread under the terms provided for in the credit agreement.

However, this increase can only occur within one year of the date on which the bank customer decides not to contract those products or services. After one year, the credit institution cannot increase the spread on this basis.

 

Conclusion of the agreement

When approving the loan, credit institutions must provide customers with:

  • a new European standardised information sheet (ESIS), with agreed loan conditions;

  • a draft of the credit agreement.

The guarantor also has right to receive a copy of the ESIS of the approved loan and the draft of the credit agreement.

The credit institution remains bound by the contractual offer submitted to the bank customer through the ESIS for at least 30 days.

The bank customer and, where applicable, the guarantor have a period of reflection of at least seven days, during which the credit agreement cannot be entered into.

The intention of these deadlines is to ensure that the customer and, where appropriate, the guarantor have sufficient time to consider the implications of the credit and to make an informed decision.

The credit agreement includes relevant credit information, namely the:

  • Identification, geographic and electronic address of the lender and, if applicable, of the credit intermediary;

  • Purpose of the credit agreement;

  • Total loan amount and conditions of use;

  • Total amount to be reimbursed;

  • Applicable interest rate regime;

  • Annual nominal interest rate, its components and method of calculation;

  • Annual percentage rate of charge;

  • Description of promotional conditions, if applicable;

  • Identification of the financial products and services purchased optionally by the consumer linked to the credit agreement, if applicable;

  • Description of the effects of the bundling on the cost of the credit agreement, namely on the interest rate spread, if applicable;

  • Explanation of the conditions of maintenance and possible revision of the effects of the bundling on the cost of the credit agreement, where applicable;

  • Repayment terms of the credit agreement:

    • Repayment modality;

    • Instalment scheme;

    • Term of the credit agreement;

    • Number and frequency of instalments;

    • Amount of the instalments in force until the first revision of the interest rate, whenever determinable; and

    • Due date of the instalments;

  • Right to early repayment;

  • Identification of required guarantees and insurance, if applicable;

  • Identification and quantification of the fees and expenses arising from the credit agreement, if applicable;

  • Identification of the maximum annual surcharge applicable in case of late payment and fee for the recovery of amounts owed, under the legal terms, as well as the conditions under which these charges may be revised in the future;

  • The procedure to be followed to terminate the agreement;

  • The consequences of non-payment;

  • Adequate information on the risks inherent in taking out loans in foreign currency, if applicable;

  • Indication of out-of-court complaint procedures and alternative dispute settlement procedures available to consumers and the respective access to these procedures;

  • Identification, geographic and electronic address of the competent supervisory authority.

Term of the agreement

During the term of the agreement, credit institutions must periodically provide their customers with a detailed statement of loan developments.

The information to be provided in the statements depends on the type of credit:

In relation to home loan agreements and other mortgage loan agreements (other than overdraft facilities, credit cards, credit lines or mortgage-backed bank credit accounts or other right over a property), the statements must provide bank customers with information on:

  • The amount of capital outstanding on the date of issue of the statement;

  • The number, due date, amount (principal and interest) and annual nominal interest rate (with identification of its components) of the next instalment;

  • The rate and amount of interest subsidy applicable to the next instalment (if applicable);

  • The identification and amount of any fees and expenses payable by the customer in the next instalment.

In the case of overdraft facilities, credit cards, lines of credit and bank credit accounts (revolving credit), secured by mortgage or otherwise relating to immovable property, statements must include the following information, in particular:

  • The credit limit;

  • The balance due on the date of the previous statement;

  • The applicable annual nominal interest rate, with identification of the respective components (reference rate and spread);

  • A description of the movements made by the bank customer with the credit card or the credit utilisation, in the case of overdraft facilities, credit lines and bank credit accounts;

  • The identification of the amount of interest, fees and any expenses levied on the customer in the period to which the statement refers;

  • Payments made by the bank customer in the period to which the statement refers, with a breakdown of the components related to principal and interest and, if applicable, to fees and expenses;

  • Balance due at the date of the current statement;

  • Payment option defined, amount payable and payment deadline;

  • Form of payment agreed and other forms of payment available, if applicable.

As a rule, the statement should be sent on a monthly basis, except in some situations where, for example, instalments are collected at a frequency other than monthly. In such cases, the statement must be sent at intervals equivalent to that fixed for the payment of the instalments, and at least one annual statement must be sent in all circumstances.

The information must be provided on paper or other durable medium. Customers always have the right to information on paper provided they expressly request it.

 

Credit institutions are also obliged to inform their customers about:

  • Changes in the contractual conditions that reflect the amount of the instalment or of the amount to be paid: information provided through the periodic statement or in an autonomous document, to be made available at least 30 days prior to the date of entry into force of said amendments;

  • Arrears, regularisation of arrearsor early repayment of the credit agreement: information to be provided through the periodic statement or, if not provided through the statement, in an autonomous document provided within 15 days of the verification of the situation.

 

In the specific case of home loan agreements and other mortgage loan agreements (other than overdraft facilities, credit cards, credit lines or other bank credit accounts secured by mortgage or otherwise relating to immovable property), credit institutions should also inform bank customers about changes in interest rates (contractually provided for). This information should:

  • Be provided through the statement or in an autonomous document provided to bank customers at least 15 days in advance;

  • Identify at least the number, maturity date, amount (principal and interest) and the annual nominal interest rate components of the next instalment.

 

During the term of a loan in foreign currency, credit institutions should periodically warn bank customers, at least when the variation of the total amount outstanding or the amount of the instalments exceeds by more than 20% the variation that would result from the application of the exchange rate between the currency of the agreement and the national currency when the agreement is concluded.

Through this warning, bank customers should be informed of the increase in the total outstanding amount and of any other mechanism applicable to limit the exchange rate risk.