Smiling all the way to the bank

The Prime Minister, having just announced a €900 million bail-out package for car manufacturers in Portugal, has predicted that consumers will have more cash in their pockets in 2009. This bold statement has so far remained unchallenged by the opposition, who appear to have accepted José Sócrates’s argument that the lowest ever interest rates, stagnating inflation and fuel at 2006 prices translate into Portuguese being better off financially than they have been the past year.

“Families can look forward to having more disposable income in 2009, which is a direct result of the dropping Euribor and interest rates. This will greatly alleviate mortgage repayments, which are today a significant part of family expenses”, argued the Prime Minister.

The Prime Minister was speaking on the eve of the European Central Bank announcing yet another substantial cut in its benchmark rate.

“Families can also expect lower inflation in 2009 and thereby gain buying power, while civil servants will have a level of buying power they have not seen in years”, José Sócrates predicted after announcing a package to save the country’s car industry while receiving an undertaking that none of the 10,000 workers employed by manufacturers in Portugal will be made redundant in 2009.

In addition, the price of crude dropped again this week, the Prime Minister recalled, and oil is now 100 USD a barrel cheaper than it was when it peaked at 147 USD in July.

Meanwhile, strict banking regulations in Portugal will ensure that home owners will see the full extent of the latest interest rate cuts reflected in their monthly repayments.

With the European Central Bank having slashed interest rates by 75 base points to 2.5 percent, which follows cuts of a half percent in October and November, even the smallest mortgage holders in Portugal can now anticipate considerable savings.

Unlike Britain, where the majority of banks have absorbed interest rate cuts in an apparent bid to boost their dwindling profits, banks in Portugal are subject to stringent regulations forcing them to pass on any interest rate cuts as soon as they become applicable.

Besides fixed rates, lenders in Portugal offer customers the opportunity to sign up to the Euribor index over a period of either three or six months, with most institutions preferring the first option.

Thursday’s cuts will therefore only be felt, at their earliest, next March, while the October 0.50 percent cut will become applicable in January.

Once all these reductions have come into force, home owners can look forward to seeing their monthly repayments fall by as much as a third.

But the good news for home owners is that analysts are predicting further rate cuts, with some venturing as far as predicting a base rate of 1.5 percent during the course of 2009.

A strong argument for further cuts is that Europe is still lagging behind the world’s other major economic powers in terms of lending rates.

While the Bank of England slashed rates on Thursday afternoon from 3 to 2 percent, the United States Federal Reserve is sitting on a rate of 1 percent, while lending in Japan comes at a mere 0.3 percent.

However, banks in Portugal are seeing a growing number of their customers face increased difficulties at meeting their monthly financial obligations.

But once again, a number of measures have been created by banks to allow customers room for manoeuvre in times of economic hardship.

A source at Portugal’s largest private bank, Millennium bcp, told The Portugal News on Thursday that repossessions are a costly and undesirable exercise and banks would rather exhaust all other avenues at their disposal before taking drastic measures against a borrower.

With unemployment rising, pay increases stagnating coupled with the spiralling cost of living, and sky-rocketing divorces, a number of customers have literally been bailed out by Portuguese banks allowing them to hold on to their properties when perhaps in other western countries they would have been out on the street.

While Gordon Brown’s move this week to cover some or all the interest on mortgages of people in financial difficulty has received widespread support in Britain, it falls short by moves introduced by some banks in Portugal allowing struggling customers to cut their mortgages by half for up to two years, or cut the percentage but have the ‘discount’ on repayments extended for up to five years.

A former home owner in the UK told The Portugal News he was ordered to pay a £10,000 penalty for paying off the £200,000 mortgage on his London home before the agreed termination of the agreed loan period.

In Portugal the cost of liquidating or transferring a €200,000 mortgage ahead of schedule will be levied at €1,000, a tenth of the cost when compared with Britain.

This minimal cost allows borrowers to move banks relatively easy should better conditions be offered elsewhere, and often, banks will absorb the 0.5 percent penalty in order to secure a new customer.