A new opportunity has arisen for young Portuguese people who want to buy their first home. In addition to the exemption from IMT (Municipal Transfer Tax) and Stamp Duty, it will soon also be possible to access housing credit with 100% financing, thanks to the public guarantee. These measures together promise to facilitate access to housing for young people up to 35 years old. However, while the tax exemption can generate large savings, the public guarantee will imply higher monthly payments, putting additional pressure on young people's incomes. In this article, we explain the minimum income required to join the public guarantee and follow the rules of the Bank of Portugal (BdP).
Public Guarantee: What Is It and How Does It Work?
With the entry into force of the IMT and Stamp Duty exemption for young people, the acquisition of housing has become more financially accessible. Recently, the regulation that introduces the public guarantee, which allows financing of up to 100% in housing credit, was published in the Official Gazette. This measure circumvents the BdP rule, which limits bank financing to 90% of the purchase value or appraisal of the property.
Although the public guarantee is already legislated, young people will have to wait until December 2024 or even until the beginning of 2025 to be able to benefit from this financing, as banks have a period of three months to implement the measure.
According to Miguel Cabrita, responsible for idealista/mortgage, "100% financing increases the pressure on the effort rate, since a higher amount of financing results in higher installments".
What is the Impact of the Public Guarantee on Young Buyers?
While banks are preparing to make the public guarantee available, young people who want to buy a house can start calculating whether it is worth dispensing with the initial down payment on the mortgage. Taking out a 100% loan means not having to save for the down payment, but it implies higher monthly installments and an effort rate that must respect the limits imposed by the regulator. Currently, the effort rate cannot exceed 50% of income and loans can have a maturity of up to 40 years for young people under 30 years old.
This solution tends to benefit young people with higher incomes, thus becoming an option available for a specific niche of the population. Although the measure aims to help young people without savings, Miguel Cabrita warns that "the high price of housing puts even more pressure on the effort rate, and full funding only aggravates this situation".
How Much Should a Young Person Earn to Join the Public Guarantee?
The simulations made by idealista/mortgage indicate how much a young couple or family needs to earn to apply for a mortgage with 100% financing, at a fixed rate of 3.30%, respecting the rules of the BdP. Below, we show the calculations for different purchase scenarios:
For a house of 150 thousand euros, the monthly installment would be 563 euros. In order for the effort rate not to exceed 50%, the minimum monthly net income required is 1,150 euros.
Here are other examples:
| House price (€) | Monthly instalment (€) | Net monthly income (€) |
|---|---|---|
| 150.000 | 563 | 1.150 |
| 200.000 | 751 | 1.550 |
| 250.000 | 939 | 1.900 |
| 300.000 | 1.126 | 2.300 |
| 350.000 | 1.314 | 2.650 |
| 400.000 | 1.502 | 3.050 |
| 450.000 | 1.690 | 3.400 |
As the value of housing rises, the incomes needed to maintain a 50% effort rate also increase. For example, to finance the purchase of a house of 250 thousand euros, the couple or young family needs to have a net income of more than 1,900 euros per month.
How to Reduce the Effort Rate?
For young people who want a greater safety margin in the family budget, it is possible to reduce the effort rate to 33%. However, this will require a significantly higher yield. Let's look at some examples:
- 150 thousand euros house: minimum net income of 1,700 euros;
- 250 thousand euros house: minimum net income of 2,800 euros;
- House of 450 thousand euros: minimum net income of 5,100 euros.
It is important to remember that there is a maximum income limit to join the public guarantee: the household cannot exceed the 8th IRS bracket (81,199 euros per year). In addition, the measure is exclusive to young people between 18 and 35 years old, with tax domicile in Portugal, who do not own any residential property.
Another important point is that the credit guaranteed by the State must be intended for the purchase of the first permanent home, and the guaranteed amount cannot exceed 15% of the value of the property. In other words, the State acts as a guarantor, ensuring up to 15% of the value of the transaction in case of default.
Conclusion: Is It Worth Adhering to the Public Guarantee?
Young people planning to buy a home should carefully evaluate the impact of the installments on their budget. The public guarantee offers an interesting solution for those who do not have savings for the down payment, but the higher installments require sufficient income to prevent the effort rate from exceeding the allowed limit.
The largest banks in Portugal are expected to make this type of credit available from December 2024 or early 2025, with the measure valid until 2026, and possibly extended depending on the results obtained.
If you are thinking of buying your first home, now may be the time to do the math and plan your real estate future.
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