The Bank of Portugal has this week urged Portuguese banking institutions to exercise greater caution in approving mortgages for their customers. Portugal’s banking regulator issued the warning in a new report, which warns that many households could face being unable to meet their mortgage repayments in the future if banks fail to put the brakes on in time.
The stark warning comes as the Portuguese real estate has experienced a mark recovery, with consumer confidence at an all-time high while an increasing number of people are finally finding employment and a stable income.
But the Bank of Portugal is not entirely convinced that the growing economy should mean banks should become more lenient in the issuing of credit. In fact, the institution believes banks may already have overstepped the line, and are now suggesting the reins be pulled in as they were in the years which immediately followed the credit crunch.
The Bank of Portugal is particularly concerned that citizens who are already covered in debt are finding ways allowing them to continue to access financing and are calling for greater restrictions. It also expressed worry that the rising property prices Portugal has been leading to a relaxation of criteria used by banks in issuing mortgages.
In its latest report, published on Wednesday, the Bank of Portugal also argues that the protracted low interest rate environment should continue to put pressure on the Portuguese banking sector’s net interest income and profitability.
“Furthermore”, says the report, “it creates incentives for an easing in credit standards and, consequently, slower than desirable deleveraging of the economy.”
As a result, the Bank is calling on financial institutions to continue to make “adequate and forward-looking assessments of borrowers’ creditworthiness, avoiding excess risk-taking in new credit flows, namely with regards to housing loans.
“In this respect, the Bank of Portugal is considering the adoption of measures to further the assessment by credit institutions of private borrowers’ creditworthiness.”
The Bank did not reveal what measures it would seek to employ to increase the checks on potential borrowers and what additional criteria it would consider using to restrict the access to credit of perennial offenders defaulting on repayments.
The Bank of Portugal also made the obvious observation that low-income earners posed the greater future risk.
According to the central bank, there are numerous families with a very high proportion of debt in relation to their earnings. It said that those earning the least were also at the greatest risk, as a loss of job or income, coupled with the inevitable increase in interest rates, could place them in serious danger of defaulting on their mortgage repayments.
In addition to implementing additional measures to thwart the issuing of “easy credit”, the Bank of Portugal has called on financial institutions to allow for a bigger cushion when noting repayments in order to give households the best possible chance of successfully withstanding unfavourable developments in the national economy or a return to pre-crisis interest rates.
Source:- Portugal News