Bank of Portugal cuts mortgage income limits

🇵🇹 The Banco de Portugal is preparing to reduce the maximum debt-to-service-to-income (DSTI) ceiling on new home loans from 50% to 40%, a move that would cut off a cohort of borrowers who entered the market precisely because a state guarantee removed the deposit barrier without addressing income-serviceability risk.

The measure is to be presented to banks the week of 19 May 2026, with implementation targeted for the start of summer 2026. It will apply to all new mortgage originations across every credit institution operating in Portuguese territory, with no opt-out available to participating lenders.

The proximate cause is Decree-Law 44/2024, enacted by the Ministry of Finance in July 2024, which created a public guarantee allowing the state to co-sign up to 15% of a property's purchase price. Banks could then lend at 100% loan-to-value without requiring a cash deposit from the borrower. The programme was subsequently expanded by €350 million, bringing the total envelope to €1.55 billion. By late March 2026, approximately €900 million of that envelope had already been committed, and total secured mortgage demand had exceeded €108 billion.

The structural distortion became visible quickly. In 2025, 21% of all new borrowers fell into the high-risk category, up from 3% the prior year. More than a third of new mortgages were being written beyond 35-year maturities. The Banco de Portugal's own research has flagged conditions approaching those of 2006, 2007, immediately before the sub-prime collapse.

Portugal's exposure to rate volatility amplifies the concern. More than 90% of home loans in the country carry variable or mixed-rate structures, a share that stands out across the EU. A DSTI ceiling of 50% in that environment carries materially different systemic risk than it would in a predominantly fixed-rate market.

Miguel Maya, president of Millennium BCP, offered qualified support for the proposed tightening.

"Looking solely at reducing the debt-to-income ratio, I think that's very good. One thing is having a Loan-to-Value ratio (LTV) of 90% or 100%. Another is the concern that families have the capacity to repay the banks and maintain a balanced life." — Miguel Maya, President, Millennium BCP, May 2026.

Maya also noted that secured loans currently in default at BCP number just six cases, but said the institution would act with greater caution to ensure families retain adequate reserves against unpredictable conditions.

The Banco de Portugal's borrower-based lending framework was first introduced on 30 January 2018 and applied from 1 July 2018, setting an LTV cap of 90% for primary residences, a DSTI ceiling of 50% with limited exceptions, and a maximum loan maturity of 40 years. The proposed cut to 40% DSTI would be the first reduction of that ceiling since the framework was established.

The structural collision is now explicit. The government built a programme to expand homeownership access for buyers under 35, removing the deposit requirement that historically screened out lower-income applicants. The central bank is now tightening the income-serviceability constraint that the guarantee left untouched. Every bank participating in the scheme, most visibly Millennium BCP, Caixa Geral de Depósitos, and Santander Portugal, faces lower origination volumes or higher rejection rates before summer. Since the limits apply only to new credit agreements, the effect on the existing stock of loans will be gradual, but the pipeline impact on the guarantee programme is immediate.

The tightening does not cancel the state guarantee. It redraws the income threshold at which that guarantee becomes usable, and in doing so narrows the addressable population the programme was designed to serve.