The current economic context in the Eurozone, marked by the escalation of inflation and the conflict between Ukraine and Russia, has had an impact on the most diverse areas of our lives, namely in housing and both in renting like buying a house.
THE updating of rents and the successive increase in interest raised the value that the Portuguese pay every month for real estate. At this point, for those who have to make a decision, it can be more difficult to assess which option is more worthwhile: renting or buying a house?
In this article, we explain How can monthly installments evolve?taking into account the new government measures in terms of renting and the current Euribor values for mortgage loans.
Government limits maximum rent increase
Finance Minister Fernando Medina announced, at a press conference, the new measures that go fight the current price increase consequence of inflation in the country.
One of the measures sets a maximum ceiling of 2% in the updating of rent valuesin housing and commercial spaces, for the year 2023. This is one of the measures to support families, to mitigate the impact of inflation, and which has a cost of 45 million euros for the Government.
Bearing in mind that the effects of inflation would make the rents could rise up to 5.43%this measure gives rise to “compensation for landlords”, as a “protection message for families, but also for owners”, guarantees the minister.
If you want to rent a house, know that the measure will have applicability from January to December 2023and covers lease contracts of more than one year. If there are rent updates during 2023, this measure applies, stopping possible increases until the end of the year.
To the landlordsthe Government will ensure a tax benefit in terms of IRS or IRC. In other words, they will be entitled to the corresponding value of the difference between the value of the income limited by 2% and the value of the income resulting from the adjustment of 5.43%.
How much can rents increase?
Taking into account a maximum ceiling of 2%, let’s see some examples of how much rents can increase.
So let’s see what the impact on rents will be. Using the average rent price in Portugal, referring to the first quarter of the year (INE data), a house of 100 square meters will have an income of 616 euros (6.16 euros per m2). Taking this value into account, an increase of 2% will mean plus 12.52 euros per month.
In a property with 170 square meters, and an income equivalent to 1047.20 eurosan increase of 2% will have a impact of 20.95 euros over the amount you pay monthly.
Imagining a house with a larger area of 230 square meters and an income of 1416.80 euros. This 2% increase will translate into 28.34 euros.
That is, in none of the cases, the increase in rents is significant due to the limit imposed by the Government. However, let’s see compensates for the mortgage loan installments or not.
Also read: What should be included in the student lease agreement?
Euribor on the rise: higher loan installments
With the current context of inflation in the Eurozone, since February 4th, Euribor rates have been rising significantly, with emphasis on the deadlines from 6 to 12 months. Due to the inflation values in several European countries, the European Central Bank proceeded to raise the reference interest rates, in order to control the situation.
how is this affect your home loan? Euribor is one of the main indicators of this credit in Portugal. Is reference rate which reflects the average charged by European Union (EU) banks to each other.
Therefore, if you have a variable or mixed rate on your home loan, will be affected by the rise in Euribor. Depending on the term you choose (one week, one month, 3 months, 6 months or 12 months), your rate is revised according to this period.
That is, if you have chosen the 6-month Euribor, the credit rate is reviewed every six months. So if the interest rates are rising, every 6 months your monthly loan payment increases.
To get an idea, the 6-month Euribor value was negative in February, in -0.476%. Now, in August, is in the positive value of 0.837%. This is because the monthly average of Euribor has been increasing.
How far can the benefit increase?
To understand how much more you can pay in your monthly mortgage payment, let’s see some practical examples with the help of the Monthly Payment Calculator.
To current Euribor average value within the period chosen on your credit, you have to add the percentage of your spread. So, imagining that the Euribor term on your credit is 6 months, the current value of 0.837%, and you have a spread of 1.2%, is left with a Nominal Annual Rate (TAN) of 2.037%.
Given that in February the 6-month Euribor was at -0.476%, this means that the your TAN was 0.724%. Assuming that the property has 100 square meters, the loan to the bank is in the amount of 134,600 euros (considering the average price of houses in Portugal, 1,346 euros per m2 – data from the first quarter, according to INE) and a repayment period of 30 years in February paid 416.07 euros.
With the current rise and a TAN of 2.037%, starts to pay a monthly installment of its credit of 500 euros. Which corresponds to an addition of 83.93 euros to the installment.
Now let’s imagine that the Euribor at 6 months increases up to 1%. With a spread of 1.2%, it now has a TAN of 2.2%, with an installment of 511.08 euros. One increase of 95.01 euros.
And putting the Euribor scenario at 6 months reach 2%: its TAN reaches 3.2% and the monthly payment reaches 582.10 euros. Starts to pay 166.03 euros more for your credit.
Interest to rise: How far can I increase my credit installment?
Based on an analysis of Euribor by Euribor Rates, it is most likely that the Euribor at 6 months does not significantly exceed 5%. Analyzing the values of the last 23 years, Euribor only exceeded 5% in two years: in 2000 and in 2008. Since then, it has been progressively decreasing, entering negative values in 2015, where it remained until April 2022.
Therefore, imagining the maximum increase of 5%, its TAN was 6.2%. This would correspond to a monthly installment of your credit of 824.38 euros. Almost double what I paid in February: plus 408.31 euros.
Also read: Euribor rates are on the rise. And now?
Renting or Buying a Home: Which is the Cheapest Option?
Rent or buy are two options with different nuances. While the first option may be cheaper in an initial period, the second turns out to be cheaper monthly.
So, when buy a property with housing credit, taking into account a T1 in Lisbon, with 150 square meters (considering INE data on average house prices in Lisbon – 1,351 euros per m2)the cost of 202,650 eurosa term payable of 30 years and a TAN (Euribor+spread) of 2.037%, its monthly installment is 752.79 euros.
In contrast, a T1 in Lisbon with the same area of 150 square meters for rent has a cost of 928.50 euros per month (data referring to the first semester – 6.19 euros per m2 in mainland Portugal). Putting the current increases in the balance, the income plus 2% value, as we have seen before, would go to 947.07 euros.
And if the Euribor increased by another 1% and the TAN on your credit rose to 3.037%, the monthly installment rose to 858.43 euros. An increase of 105.64 euros, but 88.64 euros less than if the property was rented.
Therefore, even with the recent increase in interest rates, the value of the credit installment continues to be lower than the rents practiced in Portugal. In part, due to the fact that there is little supply on the rental market.
That is, taking into account the monthly savings, it pays more to buy a property than to rent in the current scenario. However, it is also important to mention the initial costs of the two processes.
To rent a house, you have to leave a initial bond to ensure that if you do damage to the property, you can take precautions. This security is usually two lace. In this case, you would have to give the landlord an initial down payment of 1,894.14 euros.
Already buying a house with home loans, you should know that banks do not lend 100% of the amount, but a maximum of 90%, so you have to give a percentage. Therefore, imagining that of the 202,650 euros of the property, you must give 10%need 20,265 euros.
And beyond that, still have the following costs:
- Opening of the process (amount that varies depending on the bank): €550
- Municipal Tax on Onerous Property Transfers (IMT) (variable depending on the value of the property): €1,860
- Stamp Duty (0.8% of the property value): €1,200
- Deed (variable depending on the value of the property): €751
That is, in total, start-up costs to buy a house with a mortgage, you would have to give 24,626 euros. Therefore, it must Evaluate the best solution for your case and whether it pays to invest in buying a house with this initial cost, as you would pay less monthly.
If you make the decision to advance with a credityou should consult several banks and compare proposals. O Doctor Finance can help you in this process and make the best decision for your case.
Also read: Housing credit: Savings tips for the initial down payment