Percentage of housing credit over property value fell from 75% in 2022 to 69% for 2023

In 2023, the weighted average LTV ratio (ratio between the amount the bank lends to buy a house and the value of the property) of new credit operations for own and permanent housing was 69%, which represents a significant reduction compared to 2022 which was 75%. In 2023, almost all new home loan operations recorded an LTV ratio lower than or equal to 90%. The conclusions are from Banco de Portugal, which announced this Monday the implementation data of the macroprudential recommendation on new consumer credit.

The banking supervisor published today the annual monitoring report on the macroprudential recommendation on new consumer credits, regarding its compliance in 2023.

As a macroprudential authority, the Bank of Portugal, in February 2018, issued a recommendation addressed to credit institutions, regarding new mortgage and consumer loans entered into with individuals. Banco de Portugal says that the central objective of this recommendation was “to promote prudent criteria for granting credit”.

This measure is intended to strengthen the resilience of financial institutions and minimize the risk of borrowers defaulting”, says the supervisor.

On October 16, 2023, this recommendation was adjusted in order to reduce the interest rate shock underlying the debt service-to-income (DSTI) ratio stress test, taking into account the economic situation and, in particular, the pronounced increase in interest rates that was felt from the second quarter of 2022.

The recommendation is being globally complied with, guarantees the Bank of Portugal.

“In 2023, credit institutions continued to comply with the guidelines defined in the Recommendation”, says the institution, which details that around 91% of the amount associated with new mortgage and consumer credits was granted to borrowers with an effort rate, or be a DSTI ratio (assessed taking into account the interest rate shock) less than or equal to 50%.

“The use of the exceptions provided for in the Recommendation continued to be used in relation to 2022, namely for DSTI (Debt Service-to-Income) ratios between 50% and 60% and above 60%”, explains the banking supervisor.

In a context of rising interest rates, the effort rate, that is, the average effective DSTI ratio increased again in 2023, compared to the previous year.

In 2023, 68% of new home loan operations had an associated loan-to-value (LTV) ratio of less than or equal to 80%.

“As the Recommendation is aimed only at new credit operations, its influence on the stock of housing credit is gradual, although since December 2018 there has been a recomposition of the housing credit portfolio with regard to lower LTV ratios or equal to 80%”, reads the report.

Almost all new operations recorded an LTV ratio (percentage of loan compared to the value of the property) lower than or equal to 90%.

The average LTV ratio of new credit operations for own and permanent housing decreased by almost ten percentage points (pp) compared to the third quarter of 2018 and six pp compared to 2022, standing at 69%, explains the BdP.

“An improvement in the risk profile of borrowers in new housing credit operations continued to be observed”, notes the Bank of Portugal, which explains that “there was a reduction in the percentage of credit granted to high-risk borrowers (debtors with a ratio DSTI greater than 60% and/or LTV ratio greater than 90%) and an increase in the percentage granted to low-risk borrowers (borrowers with DSTI ratio equal to or less than 50% and LTV ratio less than or equal to 80%)”.

This evolution “is mainly due to the increase in the percentage of new housing credit operations with an LTV ratio lower than or equal to 80%, in a context of increasing interest rates and housing prices”, explains the institution led by Mário Centeno .

In December 2023, the weighted average maturity of new mortgage credit operations was 30.6 years, “which results from the almost widespread compliance by institutions with the convergence of the average maturity to 30 years”, says the BdP.

“It was also observed the implementation of measures by institutions that allowed the reduction to intangible amounts of exceedances of maximum limits by age group of borrowers”, says the bank.

Within the scope of the Recommendation, the concept of new credit operations includes operations by borrowers who transfer their credits from one bank to another, in which they are registered as new credits, explains the central bank.

“In 2023, there was a material volume of this type of operations compared to previous years. These transfers are included in the data analyzed in this report, so the profile of borrowers observed in this report is not directly comparable with that of previous years”, details the BdP.

Remember that in 2023 the Bank of Portugal (BdP) created a new financial cushion to protect against risks related to mortgage loans.

“The macroprudential policy measures, which include the Recommendation and, more recently, the capital reserve for sectoral systemic risk announced in 2023, were assessed by the European Systemic Risk Board (ESRB) as appropriate and sufficient given the risks identified in the real estate sector residential,” says the supervisor.

Therefore, according to the banking supervisor, in 2023, credit institutions continued to respect the guidelines relating to the DSTI ratio, the loan-to-value (LTV) ratio, the maturity of housing and consumer credit, as well as regular payments capital and interest.

“There continued to be an improvement in the risk profile of borrowers in new home loan operations, with a reduction in the percentage of credit granted to high-risk borrowers”, guarantees the Bank of Portugal.

This evolution is mainly due to the increase in the percentage of new home loan operations with an LTV ratio lower than or equal to 80%, in a context of rising interest rates and housing prices, argues the supervisor.

“It is important to highlight that, within the scope of the Recommendation, the concept of new credit operation includes operations by borrowers who transfer their credits from one institution to another, in which they are registered as new credits. In 2023, there was a material volume of this type of operations, which are included in the data analyzed in the macroprudential Recommendation monitoring report”, says the BdP.