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Home loans can be contracted with a variable interest rate, with a fixed interest rate or with a mixed interest rate.
In addition to the interest rate, customers have to pay fees and other charges associated with the loan.
In the context of offering credit agreements for the purchase or construction of permanent owner-occupied dwellings, the European Standardised Information Sheet (ESIS) must provide simulations of the credit agreement’s terms and conditions using fixed, mixed and variable interest rate arrangements. After the customer chooses the interest rate, the institution must make a credit agreement proposal.
In home loan agreements with variable interest rates, the interest rate results from the sum of the reference rate and the spread:
Reference rate (reference interest rate) – this generally corresponds to the Euribor (European Interbank Offered Rate), which is the reference rate of the interbank money market and results from the average of the quotes provided by a number of European banks. Customers can choose different deadlines, the most common being Euribor at 3, 6 and 12 months;
Spread – this is the interest rate component that is added to the reference rate. The spread is freely defined by the credit institution for each agreement, taking into account, in particular, the customer’s credit risk, the loan-to-value ratio and its cost of financing. Depending on the commercial strategy of the credit institution, the spread may be reduced as a counterpart to the, necessarily optional, purchase of other products (bundling).
In the period in which the variable rate applies, credit institutions may not revise the value of the reference rate with a different frequency than the term of that same reference rate. For example, in agreements where the reference rate is Euribor at 3 months, the value of that rate can only be revised every 3 months.
Credit institutions should also:
Ensure that the reference rate used to calculate the interest rate is clear, accessible, objective and verifiable by the parties to the credit agreement (credit institution and bank customer) and by Banco de Portugal;
Ensure that the reference rate corresponding to a benchmark monetary variable is determined by an independent institution and is adapted to the characteristics of the credit agreement in question;
Keep the historical records of the reference rate used for the interest rate, which the bank customer should be able to access simply and free of charge.
In home loans, the instalments are paid at the end of the period to which they relate. This means that the first instalment is due one month after the date of contracting the loan and the calculation of the interest due is made towards the end of that month.
The value of the reference rate to be applied is the simple arithmetic mean of the daily prices of the month prior to the period of interest.
If the bank customer contracts a loan in April with a variable interest rate indexed to the 3-month Euribor, the rate that will be in force for the following three months (May, June and July) results from the average 3-month Euribor observed on the business days of March. All agreements that start in April or that have a regular review of their Euribor rate in the month of April use the average value of the March quotations;
If the reference rate is a 1-month Euribor, the interest rate to be paid in the January instalment will be calculated in December, based on the 1-month Euribor average observed in November.
In fixed interest rate loans, the interest rate is always the same and the instalment does not change over the term of the agreement.
The fixed interest rate is freely established by the credit institution in each agreement, taking into account, in particular, the customer’s credit risk, the loan-to-value ratio, its cost of financing and the risk of setting the interest rate for a relatively long period.
A home loan agreement with a fixed interest rate allows the customer not to be exposed to the risk of interest rate fluctuations. Therefore, at the start of the loan, the fixed interest rate is usually higher than that charged on an identical loan but with a variable interest rate.
In mixed interest rate loans, the parties agree that the credit agreement has a period in which the rate is fixed, followed by a period in which the rate is variable.
For example, a 30-year home loan may have a fixed rate for the first 5 years and a variable rate indexed to Euribor for the remaining 25 years.
In the period in which the variable rate applies, credit institutions may not revise the value of the reference rate with a different frequency than the term of that same reference rate. For example, in agreements where the reference rate is 3-month Euribor, the value of that rate can only be revised every 3 months.
The interest rate, freely negotiated between the credit institution and bank customers, is only one of the charges payable for the loan.
Customers have to pay fees and other charges (for example, with the opening of the process and valuation of the property) that are charged by the institution at the beginning of the transaction (‘upfront’) and during the term of the agreement. A single fee may be charged for the analysis of and decision on the credit application, without prejudice to fees and expenses regarding the valuation of the property.
In order for customers to know the cost of the loan, credit institutions must present:
The annual nominal interest rate represents the cost associated with the loan interest.
The annual percentage rate of charge represents the total cost of the loan, including the annual nominal interest rate and other charges levied by the credit institution. It is expressed as an annual percentage of the total loan amount.
As a measure of the total cost of the loan for the customer, the annual percentage rate of charge should be used to compare different offers with the same repayment term and modality.
The calculation of the annual percentage rate of charge includes:
The expenses, in particular taxes and mortgage registration fees, in the case of a mortgage loan;
The insurance required to obtain credit;
The maintenance fee of a current account, which must be opened for the loan management;
The costs related to the use of a means of payment and utilisation of credit, if applicable;
The remuneration of the credit intermediary, if it is paid by the consumer, when the credit intermediary is not tied;
Other charges associated with the credit agreement.
The calculation of the annual percentage rate of charge does not include:
The amounts payable due to non-compliance with any of the obligations of the credit agreement;
The fees for early repayment of the loan;
The total amount to be reimbursed corresponds to the total amount that the customer pays for the loan, i.e. the sum of the loan amount and the respective interest, fees, taxes, insurance and other costs.
In home loans, stamp duty is levied on:
the amount financed:
0.04% for periods of less than 1 year;
0.5% for periods of 1 to 5 years;
0.6% for periods of more than 5 years;
fees charged – 4%.
Instruction No 19/2017 (in Portuguese only)
Simulate – Home loans