Visitors to the Algarve who decide to invest in a holiday or future retirement home may be surprised to find that there are fewer choices here than in their home country for obtaining a mortgage.

There are several reasons for this, including the fact that despite the opening up of the domestic market in recent years following reductions in interest rates few Portuguese banks will consider a mortgage application from foreign non-residents, although this may change in the future. Also the legal system for security loans on a property is cumbersome, implying a slow and costly process for foreign mortgage lenders. This is the main reason that only a very few non-Portuguese banks provide mortgages in the Algarve.

There are three banks that dominate the foreign mortgage market: a well-known British offshore bank with a representative office in the Algarve; a Danish offshore bank and the London branch of a Portugues bank. Besides that, some independent mortgage brokers intermediate in obtaining a mortgage.

Normally an offshore company is formed to hold title to the property in Portugal. The banks then secure the loan on the shares of the offshore company. The offshore route is a common form of property ownership and has several tax advantages that may outweigh the disadvantage of paying annual management charges (normally in the range of £ 500 - £ 1000 each year). An accountant or specialist tax advisor can provide advice on specific details of offshore company ownership. See my article on offshore companies.

Mortgages are available in a variety of European currencies as well as in US dollars. Now one of the banks has introduced a EURO mortgage. Now the interest rate is approx. 6%. Moreover, expenses related to setting up a mortgage is reduced; also as a life insurance is no longer a requirement.

It is difficult to find a fixed rate mortgage in any currency, so you will probably be offered a variable rate pegged at around 1,5 - 2% over the benchmark base lending rate of the chosen currency. As an example currently sterling mortgage rates are in the range of 9-9,5% and the D-mark rates are in the range of 7-7,5%. The maximum loan available relative to the value of the property is generally limited to 75% of the valuation value or sales price whatever is the lowest. Experts of the respective banks carry out valuations and local appointed and qualified lawyers will accompany the whole procedure.

Anyone applying for a mortgage will normally be required to provide proof of income, whether from employment, business, investments or pensions. Tax returns will also be required, although “non-status” mortgages are available in certain cases.

Portuguese nationals and anyone with the official “ Residencia “ card and a history in this country will have a wider choice by contacting a branch of one of the many Portuguese banks that have multiplied all over the Algarve in recent years. Following massive reductions in interest rates in the last three years, local banks initially offered mortgages around or below 5,5% in Escudos or even between 3 and 4% for young starters in the market, with the rate sometimes fixed for a period. Some provide mortgages on other currencies as well. Up to 90% loans are common, but tax returns are always required from applicants.

On the other hand, despite the fact that mortgages are now available to Portuguese nationals it has not always been common practise to have the interest rate fixed for longer periods. Because of this and the increase in interest rates during the period between June 1999 and June 2000 (an increase of over 40%) many people may find themselves already in trouble complying with their monthly re-payments.

Mortgages can also be arranged through a small number of brokers and financial advisors, some of which will charge fees. This could be a good route to take in order to find out all the available choices and your broker should advise on the mortgage which best fits your pocket , personal circumstances and your property.

Finally, before making an application for any mortgage it is wise to ascertain and compare the level of associated costs in order to budget accurately for your purchase. Banks will pass on legal costs to borrowers, as legal fees in Portugal generally higher than elsewhere these costs may be considerable, and a lawyer can provide some estimate before committing to a purchase.

In addition, each bank charges for surveying and valuing the property. In order to reduce costs these valuation reports are specifically designed whether the property is suitable security for the loan you require.

Therefore, the valuation is neither a building survey nor a report on condition, both of which require a much fuller inspection. A surveyor should undertake this type of report.

Despite the cost involved, this service provides a useful check on construction quality and confirms that you are paying a fair market price for your home.