Updated: September 6, 2023
Portugal seems to be on the mind of many expats, and not just because of the excellent quality of life you can experience there. Individuals from across the world have been looking to Portugal’s booming real estate market – including its rental property market – and jumping at the opportunity to secure a nice return on their investment, with many wondering how they can turn their investment into real estate income. Investing in buy-to-let properties is one way to do this. In this article, we’ll provide you with key considerations for getting a buy-to-let mortgage: How they work, who is eligible, plus much more.
To learn more about buy-to-let investments, visit our article: Buy-to-Let: An Overview.
Choosing a Buy-to-Let Mortgage
For a first-time buyer, the words buy-to-let mortgage might be completely new. So, what does this term mean? Buy-to-let mortgages are specifically for people intending to buy property as an investment and to generate monthly rental income rather than for those planning to live on the property themselves. A residential mortgage will be more appropriate if you want to live on the property.
How do buy-to-let mortgages work?
A mortgage is a loan used to purchase (or maintain) a property or piece of land. Buy-to-let mortgages enable investors and landlords to buy properties and rent them out to other individuals. Here is a basic overview of how a buy-to-let mortgage works:
Put down your deposit
The deposit required for buy-to-let mortgages is generally higher than for a residential mortgage. The amount is typically around 25 percent of the property’s value but can sometimes be as high as 40 percent, while for residential mortgages, this is lower. In Portugal, the minimum deposit for buy-to-let mortgages for non-residents is typically 30 percent.
Interest only mortgage payments
It is common for borrowers to take out interest-only mortgages for their property, as it means repaying only the interest on the mortgage each month. The main reason is the lower monthly payments. However, by the end of the mortgage term, you still owe the original amount you borrowed and will be charged interest on the full balance each month until you have paid it back.
Pay back the full amount
At the end of the mortgage term, you will need to pay back the initial amount borrowed. To do so, investors often sell the investment property to pay off this debt. In Portugal, interest-only mortgages are typically only available for new constructions and are limited to a two-year term.
If an interest-only mortgage is not for you, you can opt for a repayment mortgage instead. This type of mortgage has higher monthly repayments, but you will have fully repaid your debt by the end of the mortgage term. While most mortgages in Portugal are principal plus interest loans, banks do offer both fixed-rate and variable-rate mortgages. The fixed-rate mortgage monthly payments stay the same for a fixed period, while the mortgage interest rates on variable-rate mortgages can increase or decrease based on the lender.
How much will my buy-to-let mortgage cost?
The cost of your buy-to-let mortgage will depend on several factors, including:
The size of your deposit
The larger your deposit, the smaller mortgage you will need to borrow. As mentioned, mortgage lenders in Portugal generally ask for a deposit of 30 percent from non-residents.
The amount you pay back each month will depend on the type of mortgage you take — fixed-rate, variable-rate, interest-only, or repayment.
Most mortgages in Portugal run for 25 years, but it is possible to get terms of up to 30 years. The borrower’s age can affect the loan terms the lender will allow. Your loan term will affect the size of your monthly payments.
Many Portuguese banks and mortgage providers have online mortgage calculators on their websites. You can use these tools – a buy to let mortgage calculator – to get an idea of how much your buy-to-let mortgage will cost. You can estimate your monthly repayments based on the amount you borrow, the interest rate and fees of your mortgage deal, and your loan term. Ultimately, it can help you decide which buy to let mortgages you should consider.
Who is eligible for a buy-to-let mortgage?
Different lenders may have different eligibility requirements. The list below is a guideline of general requirements:
The minimum age in Portugal is 18, and the maximum age to complete your payments is 75. These limits may vary depending on the mortgage lenders.
Some lenders may require a minimum income for a buy-to-let mortgage. The lender will also need to ensure you do not belong to non-repayment or late repayment risk groups. Your income may also influence the amount of financing you can receive, as well as the loan’s interest rate.
The minimum deposit required may vary depending on your lender, but for non-residents in Portugal, it is typically 30 percent of the property value.
Mortgage lenders assess your credit history to determine if you are a reliable borrower who will make their monthly repayments in full and on time. If you need a good credit score, you may want to improve it before applying for a buy-to-let mortgage.
How can I get the best deals on a buy-to-let mortgage?
Here are some helpful tips to ensure you get the best deal on your buy-to-let mortgage:
Compare a wider range of mortgage deals to find the cheapest rate
With various banks and lenders to choose from, you may be wondering where and how to find the best deals on a buy-to-let mortgage. Doing your research is the easiest way to compare deals and find the best interest rate. Visit lender websites to see what they offer, or speak to mortgage brokers who can compare deals for you. Having an experienced mortgage broker on your side can make your process of buying in Portugal as hassle-free as possible.
Keep an eye on your credit score
Maintaining a good credit score is generally a good habit. As your score can impact buy-to-let mortgage rates and the mortgage deal you receive, it is essential to check your rating and take the necessary steps to improve it before applying for your mortgage.
Consider what type of mortgage is right for you
As we’ve discussed, there are different types of mortgages available to borrowers. Take the time to research the pros and cons of each and decide what type of mortgage is best for your individual situation.
Be mindful of fees
Take note of any fees attached to your mortgage loan, such as an early repayment charge for leaving the deal before the end of your mortgage term. These fees, plus letting agent fees, can affect the overall cost, so make sure you know what they are.
What to consider before choosing a buy-to-let mortgage?
Different factors can affect your finances when applying for a mortgage. Two important factors to consider are tax implications and the loan term.
There are tax implications for buy-to-let investors, such as income tax on income from rental properties and capital gains tax. In Portugal, income tax on rental income is charged at a rate of 28 percent. If you plan to sell your buy-to-let property at the end of your loan term, you will pay Capital Gains Tax at a rate of 28 percent if you are a non-resident.
It is essential to consider your loan term in planning your mortgage repayments, and for this, you can use your rental income from the property to help meet these repayments. However, it’s important to note that you may not always have tenants in your property, meaning you may not always have a rental income.
For such periods when you don’t have rental income, known as ‘void periods,’ you will need to have a financial backup to continue to meet your monthly mortgage repayments.
How to Compare Buy-to-Let Mortgages
A rental property can prove to be an excellent source of passive income in the long term. Yes, Portuguese real estate is a good investment, whether you intend to live in the property yourself or rent the property out. While there are no restrictions on non-EU residents wanting to buy property in Portugal, your status as a Portuguese resident or non-resident will affect the amount you can borrow.
Compare mortgages from different banks
A good first step is to compare banks. Portugal has over 15 banks that offer different mortgage loans to purchase a property. These banks include Banco Best, Banco CTT, Bankinter, BBVA, and Santander. Each of these banks has different eligibility criteria and you will need to assess the suitability of the loan offered to your individual situation, as it may not be the best deal available.
One thing to remember is that you may encounter some language barriers during this process, so it is helpful to have someone to help you who speaks both Portuguese and English. This person should ideally be a professional in the field who can offer expert advice.
Another advantage of purchasing property in Portugal is the ability to apply for citizenship after five years of residency. Our article, Buy Property in Portugal and Get Citizenship, gives a fantastic overview of how to do this.
Goldcrest: How We Can Help You
At Goldcrest, our team will be delighted to help you find the perfect property for your investment. We offer expert and impartial advice, working with you to find the perfect home or substantial real estate investment in Portugal’s most desirable locations and at the best possible terms.
Our team works diligently to ensure the correct steps have been carried out, safeguarding you from poor property investments. For the past decade, we’ve been building our inside knowledge of the local property market and have established extensive connections across Portugal, enabling access to an exclusive list of properties and investment routes.
Contact us now, and let’s handle the process and help you find your dream property investment.
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Frequently Asked Questions about Mortgages for Buy-to-Let
How much deposit do I need for a buy-to-let mortgage?
For non-residents, the minimum deposit required for Portuguese buy-to-let mortgages is typically 30 percent of the property’s purchase price.
As part of the mortgage payment, you will need to pay the buy-to let mortgage deposit to secure financing for your property in Portugal.
Can I get a buy-to-let mortgage with no income?
It can be possible to get a buy-to-let mortgage without proof of income. However, this will depend on your individual circumstances and the lender. Some lenders do not have minimum income requirements and base the decision to lend on the rental income that the property will generate. The best buy-to-let mortgage available for you may be different from another person buying in Portugal, as each bank will have different deals for different buyers.
How much does a buy-to-let property cost?
The cost of a buy-to-let property will depend on the type of property and its location. There are also other costs to bear in mind, such as the taxes and fees associated with purchasing a property. This can include property tax, stamp duty tax, legal fees, tax office fees, agent fees, and notary and registry fees.
What happens at the end of my interest-only buy-to-let mortgage?
By the end of the interest-only mortgage term, you will still owe the initial amount borrowed. You will continue to be charged interest on the full balance of the mortgage each month until you have paid it back in full. For this reason, it is essential to have a repayment plan for when the mortgage term comes to an end.
How many buy-to-let mortgages can I have?
The number of buy to let mortgages you can take out can vary from lender to lender. Each lender will have their own criteria and will typically assess applicants based on their individual cases. Some lenders may cap the total number of mortgaged properties, while others will look at the total number of properties you own.
In what case might a buy-to-let mortgage be declined?
There are a number of reasons why your buy-to-let mortgage may be declined. You may fail to meet the lender’s income and affordability criteria, you may not be able to put down a substantial enough deposit, the rental income from the property may not be enough to cover your monthly mortgage payments, you may have a poor credit history, your mortgage debt may be maxed out (i.e. you may already owe a substantial amount or you have a number of mortgages to your name), or you may fall outside of the desired age bracket for the lender.
Can I live in a house with a buy-to-let mortgage?
Buy-to-let mortgages are specifically designed for landlords intending to purchase a property and rent it out – and secure rental income from tenants. If you breach the conditions of your mortgage, such as living in the house yourself, your lender may be within its rights to ask you to repay the mortgage in full and/or repossess the property if you are unable to do so. It is important to inform your mortgage lender and insurer of any such changes to the conditions of your mortgage.
If you are looking to live in the property, you should consider residential mortgages.
Can I change my mortgage to buy-to-let?
If you have a residential mortgage and wish to switch to a buy-to-let mortgage, you will need to get permission from your lender. If your lender declines this request to change your residential mortgage, it may be possible to get a remortgage with a new lender. However, such a change will result in repayment charges depending on your mortgage term, and the new mortgage may not be the best deal available. Bear in mind that if you are looking to live in the property, you should opt for residential mortgages.
How much rental income can I receive from a buy-to-let in Portugal?
This will really depend on the part of Portugal you buy the property and the rental property you opt for, as interest rates will vary across the country. Lisbon and Porto are good options to consider if you are looking to get a nice return on your investment, despite the fact that house prices are higher in these two cities. However, choosing a location will depend on your personal circumstances and preferences. A rental property can prove to be an excellent source of passive income in the long term.