Portugal’s banks forced to renegotiate mortgages of most indebted families

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LISBON, Nov 4 (Reuters) – Portugal’s government has decreed that banks will have to renegotiate mortgages of up to 300,000 euros ($293,700) for the most indebted families and offer them better financial conditions to deal with rising interest rates and avoid default.

Treasury Secretary Joao Nuno Mendes said late on Thursday that would apply to households whose total loans are above 36% of their net income or if their debt-to-income ratio increases by five percentage points compared to now.

Banks have 45 days to identify the families and move forward with negotiations to extend the term of the mortgage loan, make a new more favourable loan, or reduce the interest rate for a period of time, he said. The rule will be in force until the end of 2023.

“This decree is essential for difficult situations of those (families) who could default, which is something that is not in anyone’s interest, including the banks themselves,” he said.

In Portugal, around 90% of the stock of 1.4 million mortgages have variable rates indexed to six-month and 12-month Euribor rates, which have risen following the European Central Bank’s recent interest rates hikes.

The average debt-to-income ratio, including all loans and not only mortgages, stands at 17%. This is much lower than the 36% threshold of the bill, and 90% of the mortgage loans have an effort rate below 27%.

Portugal’s banks are still scarred by a spike in bad loans after the country’s economic and debt crisis in 2010-13. They have since reduced non-performing loans to a total of 11.4 billion euros as of June 2022 from a peak of 50 billion euros in June 2016. The NPL ratio was 3.4% of total credit in June, versus 17.9% in mid-2016.

($1 = 1.0215 euros)

(Reporting by Sergio Goncalves; Editing by Chizu Nomiyama)

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