Bank of Portugal tightens household credit rules, lowering debt-service limit to 45% from August

New borrowing limits

The Bank of Portugal announced on Thursday that from August 1, the maximum debt service-to-income ratio (DSTI) for new household loans will drop from 50% to 45%. The DSTI measures the share of monthly net income consumed by loan repayments, assuming a 1.5 percentage point interest rate shock. The central bank also reduced the share of loans that can exceed this limit from 15% to 10% of each bank's new lending. In practice, banks were already using only about 6% of that exception margin in 2025, so the immediate impact may be limited.

Housing market pressures

The tightening comes as Portugal's housing market shows signs of overheating. House prices jumped 18.9% year-on-year in the fourth quarter of 2025, one of the steepest increases in the European Union. The stock of housing loans grew 10.6% over the past year, more than triple the euro area average of 2.9%. Consumer credit expanded 8.5%, against 5.3% in the euro zone. The central bank noted that real estate exposure in banks' balance sheets rose to 27.7% in the first half of 2026, up from 26.6% in 2024.

Borrower risk profile

New borrowers are increasingly young, with lower incomes and larger loans. Since August 2024, borrowers under 35 have accounted for 62% of new housing loans. The average loan under the government's youth guarantee reached €207,000 in the last quarter of 2025, compared with €183,000 without it. Despite rising disposable incomes, the effective DSTI on new consumer credit remained stubbornly high at 49.3% in 2025, barely below the 50% cap. The central bank warned that two-thirds of consumer credit borrowers belong to the three lowest income quintiles, and 30% of the lowest wealth quintile hold unsecured consumer loans.

Maturity rules simplified

The Bank of Portugal scrapped the previous goal of converging average mortgage maturities to 30 years. Instead, it set two fixed maximum terms: 40 years for borrowers aged 35 or under, and 35 years for those older. The change acknowledges that younger buyers, who now dominate the market, naturally need longer repayment periods. For consumer credit, maturity limits remain unchanged at seven years for personal loans and ten years for auto, education, health, or energy-transition loans.

Supervisory stance

The new rules are issued as a recommendation under the "comply or explain" principle. Banks that do not follow the limits must justify their decisions to the supervisor. Governor Álvaro Santos Pereira has publicly stated his intention to ask the government to begin the legislative process to make the recommendations legally binding. The central bank said it will closely monitor compliance and may impose other measures if justifications are inadequate.