Everything there is to know about permanent housing and secondary housing, as well as the credit differences in each
To ensure well-being, comfort and tranquility within the family, some are looking for a house to buy . Acquiring your own permanent home is an important step in the life of the Portuguese, as many need to take out a home loan, thus representing a long-term investment.
There are also those looking to buy a second home , whether for a holiday or an investment perspective, by subsequently placing it on the rental or Local Accommodation market. But the current climate, marked by high inflation and rising interest rates on home loans , brings new challenges for families.
And the expenses with the purchase of the house are added to the taxes to be paid. In this article, we explain everything you need to know to buy your first home or a holiday home.
What are the differences between own housing and secondary housing?
Before buying a house , it is important to clarify the differences between the real estate concepts of Permanent Own Housing (HPP) and Secondary Own Housing (HPS), which are actually very simple:
Permanent Own Residence: refers to properties used as the main and habitual address of the owner and his household. This housing corresponds to the tax address of the families on the Finance Portal;
Secondary Own Residence or simply secondary address: refers to properties that do not correspond to the official and permanent address of the owner and family and which, in many situations, is used for holidays. For example, if you have a property in the Algarve or Madeira to spend holidays with your family or to rent, it is a secondary home . .
Buying your own permanent home: everything you need to know
Before diving into the adventure of buying a permanent home, several aspects must be taken into account. From the outset, the family must define the location and a maximum value for the purchase of the house based on the available savings. And then you have to research and visit many properties until you find the ideal home to buy. Next, for many households, is the search for the most advantageous and appropriate mortgage loan . And here there are several aspects to balance.
Mortgage credit to buy your own home
For the acquisition of permanent housing , the rules of the Bank of Portugal say that bank financing can go up to 90%, with a mandatory deposit of 10% of the total value of the house.
So far so good. It so happens that the mortgage market has become more expensive since the beginning of the year, when Euribor rates began to rise in anticipation of monetary policy moves by the European Central Bank (ECB). From July to December, the European regulator decided to raise key interest rates by 250 basis points, fueling the rise in reference rates.
In this context, variable rates are rising on a Euribor ride. And flat rates are on the rise too, as banks adapt offering fixed rates to the price of cash. The most recent data from the Bank of Portugal (BdP) point to the following increases in interest rates:
Variable rate loans: the average interest rate on new contracts rose from 0.6% to 2.6% between December 2021 and October 2022;
Fixed rate loans: the average interest rate on new contracts rose from 2.1% in December last year to 4.1% in October 2022.
There are also other hidden effects on housing credit to buy a house that come from the more restrictive monetary policy. As interest rates are included in the calculation of the household effort rate , it ends up reducing the amount that banks are authorized to lend. This means that, in the case of the acquisition of the first house, the amount financed may be less than 90% of the price of the house.
In addition, Eurozone banks reported a “strong tightening of credit criteria for loans to households for house purchase ” in the third quarter of 2022, the ECB said , noting that this is a trend that will continue in the coming months. The objective of banking entities is to avoid an increase in default situations.
Tax advantages and house taxes payable
There are several taxes associated with buying a home, so before moving forward with the business, the family should also have savings to pay these fees to the State. With regard to the acquisition of permanent housing, there are some tax advantages for those who buy a house up to a certain amount, such as:
Tax advantages on IMT (Municipal Tax on Transmissions Onerous) : there is exemption from payment of IMT when purchasing a permanent home for less than 93,331 euros in mainland Portugal, and for less than 116,664 euros in the Autonomous Region of the Azores and in the Autonomous Region from Madeira;
Tax advantages on the IMI (Municipal Property Tax) : there are some exemptions provided for with the acquisition of permanent housing during a certain period. For example, when the taxable value does not exceed 125 thousand euros, these properties are exempt from IMI for three years. In this case, the exemption is automatic. Other cases can be known in detail on the Finance Portal .
Financial gains: if you decide to sell your home for a price higher than the purchase price, you can buy another one (always for your own permanent home) at the same or higher price, without having to pay taxes to the State on the profits made.
Buying a second home: what to consider?
Many families choose to buy a second home in Portugal, either to spend holidays or even to do business with renting or Local Accommodation. After deciding the perfect place to buy a second home , it is important to know the bank financing options available, as well as the taxes to be paid.
How does credit work to buy a second home?
Having a second home for holidays is a dream of many Portuguese people, to enjoy long stays with family or friends. But if the family needs to resort to bank financing to buy the secondary home, there are differences to take into account.
Those who already have a housing loan to buy their own permanent home and intend to apply for a loan to buy a second home may find themselves with less favorable conditions. This is because the effort rate will be higher, so the banking entity understands that the risk of default will also be higher.
The main difference between home loans to buy the first house and the second is related to the Loan-to-Value (LTV), that is, the amount that banks lend against the value of the house. In the case of a home loan to buy a second home, the maximum financing allocated is around 80%, while for the purchase of a permanent home, financing reaches 90%. That is, in housing loans to buy a second home , the amount financed by banks is smaller.
The entire panorama associated with rising interest rates and tighter rules for granting new housing loans applies equally to loans for the acquisition of a second home.
Are there tax benefits when buying a second home?
As far as taxes are concerned, there are no tax breaks for secondary housing . From the outset, there is no exemption from IMI. And you will also have to pay the Stamp Duty (IS) and Municipal Tax on Onerous Transfers (IMT). When the sum of real estate assets exceeds 600,000 euros, you may be required to pay the Additional Municipal Property Tax ( AIMI ), as in the purchase of your own permanent home.
It is also mandatory to pay capital gains for a secondary home. That is, as soon as the secondary housing is sold, you will have to keep part of the capital gains for the IRS settlement . There, the value of the tax is calculated according to the capital gains obtained.
Buying a second home in Portugal attracts more and more foreigners
The quality of life, gastronomy, beaches and mild climate that Portugal offers has attracted more and more international citizens to visit our country - but not only. “ Buying a second home in Portugal is, today, a big trend for foreign customers”, said Patrícia Barão, Head of Residential at JLL, in statements to idealista/news.
There are foreigners looking for the combination of leisure activities that Portugal has to offer. But there are also many foreigners who seek to live in an environment of peace, taking refuge from the political, social and economic instability that has installed itself in several countries around the world, as is the case of the USA, Brazil, the United Kingdom and the countries that border with Russia and Ukraine, which are currently experiencing an armed conflict.
“The growing instability and insecurity that is registered in countries like the USA or Brazil, normally resulting from electoral acts or disrespect for freedom, makes North Americans and Brazilians one of the most active nationalities in the purchase of a house in the Portuguese market", he said . David Moura-George, managing director of Athena Advisers Portugal, who really believes that "for these people, arriving in Portugal means starting a new life in an atmosphere of peace, security and freedom”.
The Bank of Portugal itself highlighted, in the Financial Stability Report of November 2022, the "relevance of non-residents in the dynamism of the residential real estate market " in the last decade. And he concluded that “after some reduction following the pandemic, housing transactions involving buyers with tax domicile outside Portugal increased significantly again, with the majority contribution of buyers with tax domicile outside the European Union (EU)”.
Specifically, non- resident buyers in Portugal accounted for 11.7% of the value of housing transactions in the country in the four quarters ended in June. In addition, foreigners are buying houses in Portugal much more expensive than residents. The average transaction value for non-resident buyers is 95% higher than for resident buyers, the report points out.
Buying a house to rent: what to consider
There are still those who buy a house to put it on the rental market afterwards . Acquiring a house to rent has a very concrete objective: to generate income in the long term.
Some banks have housing loans for rent , but it should be borne in mind that the percentage of financing , considering the value of the property, will be lower than that of housing loans for permanent housing. The interest rate is usually higher as this will not be the family's main home.
As with the purchase of permanent housing and the acquisition of secondary housing, there are several taxes to be paid in this case:
IMT (Municipal Tax on Onerous Transmissions) ;
IMI (Municipal Property Tax);
Stamp Duty (IS) on the purchase and sale;
Acquisition records and the cost of the public deed of purchase and sale.
In order to get the best possible return, it is important to consider the location of the property, the surrounding services and the type of house. It should be noted that before putting the house up for rent , reconstruction work may be required .
The important thing is that, after all, you manage to be profitable in the business. A study by idealista shows that the gross profitability of buying a house in Portugal for rent was 5.9% in the third quarter of 2022, a value 0.2 percentage points (pp) higher than that calculated for the same period of 2021 ( 5.7%). Santarém (7.6%), Viana do Castelo (7.2%) and Leiria (6%) stood out for being the district capitals where buying a house to rent is more profitable. And Lisbon (3.8%), Aveiro (4.3%) and Faro (4.5%) are the cities where this business is less attractive.