Buy a Holiday Home in Portugal
With interest rates low, many holidaymakers and investors are starting to think more about purchasing a holiday home in Portugal, however, while simple holiday rental costs versus mortgage cost comparisons can be very attractive, buying a holiday home in Portugal is a serious commitment, and there are many factors to consider:
How long you plan to live in the house?
Buying a holiday home in Portugal costs money and if you only keep the property for a short while, the value of your home may not have appreciated enough to cover the costs of selling on. The length of time that it will take to cover the costs of buying a holiday home in Portugal depends on various economic factors. Average appreciation tends to sit at around 5% per year.
In this case, you should plan to stay in your home at least 3-4 years to cover buying and selling costs, however, the real estate market can be particularly volatile, and dramatic swings up and down are not uncommon.
How long will the house meet your needs?
What features do you require in a house to satisfy your lifestyle now and five years from now? People tend to keep their houses in Portugal longer than they initially intend, primarily due to the sunny weather, lifestyle and expense associated with selling.
Therefore it is worth considering buying a vacation home that will also suit your needs in the future. Could the basement be turned into a den or extra bedrooms? Could the attic be turned into a master suite? Having an idea of what you'll need will help you find a home that will satisfy your needs for years to come.
Is now the right time financially for you to buy a holiday home in Portugal? Would you rate your financial picture as healthy? Is your credit good? While you can always find a lender to lend you money, people with poor credit tend to pay far more to borrow. Some say that you should refrain from borrowing as much as you qualify for because it is wiser not to stretch your financial boundaries.
The other school of thought says you should stretch to buy as much house as you can afford, because with regular pay rises and increased earning potential, the big payment today will seem like less of a payment tomorrow. It is, however, important to stay within your comfort zone. Purchasing a house in Portugal involves many up-front and ongoing costs, and the stress of worrying about those costs often outweighs the satisfaction that may come from owning a holiday home abroad.
To determine how much of a house you can afford, talk to a lender or go online and use a house affordability calculator. Good calculators will give you a range of what you may qualify for. Then call a lender. While some may say that the "28/36" rule applies, in today's home mortgage market, lenders are making customised to a particular person's situation. The "28/36" rule means that your monthly housing costs shouldn’t exceed 28 percent of your income and your total debt load shouldn’t exceed 36 percent of your total monthly income.
Depending on your assets, credit history, job potential, and other factors, lenders can push the ratios up to 40-60% or higher. While we're not advocating you purchase a house in Portugal utilising the higher ratios, it’s important for you to know your options.
Where will the money come from?
Typically, house buyers in Portugal will need some money for a down payment and closing costs, however, with today's broad range of loan options, having a lot of money saved for a down payment is not always necessary if you can prove that you are a good financial risk for a lender.
If your credit isn't stellar but you have managed to save 10-20% for a down payment, you will still appear to be a very good financial risk to a lender. High-ratio mortgages can be a good option for those who haven’t managed to save a large chunk of money, but naturally, these have additional costs associated with them.
The costs of home ownership
Maintenance, improvements, taxes, and insurance are all costs that are added to a monthly house payment. If you buy a condominium or townhouse, a monthly homeowner's association or maintenance fee will be required. If these additional costs are a concern, you can make choices to lower or avoid fees.
Be sure to make your realtor and your lender aware of your desire to limit these costs. If you are unsure if you should buy a holiday home in Portugal after making these considerations, you may want to consult with an accountant or financial planner to help you assess how your house purchase fits into your overall financial goals.