Portuguese Mortgage Market Sees Sharpest Contraction of 2025 in August
The volume of new mortgage contracts in Portugal experienced its most significant monthly decline in seven months, according to data released this Wednesday by the Bank of Portugal. In August, the amount of new home loans, excluding renegotiations, fell by 16.3% to €1.767 billion from €2.111 billion in July. When including renegotiated contracts, the total for new housing loan operations dropped by a more moderate 13.4% to €2.164 billion.
This market contraction occurs despite a continued easing of financing costs. The average interest rate on new home loans decreased for the seventh consecutive month, settling at 2.86% in August. This marks the lowest level recorded since November 2022 and represents a 34-basis-point reduction over the first eight months of 2025, reflecting the broader impact of the European Central Bank's monetary policy on the Portuguese credit market.
The current scenario suggests a market characterized by increased prudence among borrowers, where lower interest rates are not sufficient to drive higher credit volumes. This cautious behavior is contrasted by the growing presence of younger buyers. Individuals up to 35 years of age now represent nearly 60% of the total amount of new credit for home purchases. This figure has risen substantially from the 44% share they held between January 2022 and July 2024.
Market analysts attribute this demographic shift to government incentives, including a state-backed public guarantee that now covers 25% of credit granted this year and the exemption from IMT (Property Transfer Tax) and IS (Stamp Duty) for young buyers, which was enacted in August of the previous year. These policies have visibly altered the composition of the market, increasing the purchasing power of the younger generation.
While new lending has slowed, the renegotiation of existing mortgages continues to be a relevant factor. According to calculations by ECO, renegotiations increased by 2.32% month-over-month, from €388 million in July to €397 million in August. However, when viewed within the total credit landscape, overall renegotiations across all loan types saw a slight decrease of €12 million, totaling €421 million in August.
The Bank of Portugal's report also noted a widespread reduction in new loans to individuals across all categories. The total amount of new personal loans fell to €2.551 billion, a decrease of €485 million from July, with the decline being most pronounced in the housing loan segment.
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In other credit segments, the average interest rate for new consumer loan operations fell by 0.06 percentage points to 8.77%, the second consecutive monthly drop. Meanwhile, the average interest rate for loans for other purposes remained stable at 3.53%.
The combination of reduced credit demand and falling interest rates points to a complex and evolving real estate financing environment in Portugal. The data suggests that while financing is becoming cheaper, buyers are becoming more selective and cautious in their borrowing decisions, a trend that could influence property transaction volumes in the coming months.
This dynamic is shaping a new phase for the property market, where affordability gains from lower rates are being weighed against broader economic considerations by potential buyers. The central bank will continue to monitor these trends closely as they provide key insights into the health of both the financial sector and the wider economy.
The central role of government incentives in sustaining demand, particularly from first-time buyers, highlights the sensitivity of the market to policy decisions. As these dynamics unfold, the trajectory of the housing market will depend on the interplay between financing conditions, buyer confidence, and regulatory support.
Industry observers will be watching closely to see if the contraction in August represents a temporary dip or the beginning of a more sustained trend of moderation in the Portuguese housing market. The next set of data will be critical in assessing the market's direction for the remainder of the year.
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