uying a new house is always a huge step to take because of everything involved, from the costs to all the bureaucracy. Generally, it's the cost part that ends up scaring you the most. With the evolution of house prices in recent years, plus the economic instability that has been witnessed, buying a house seems increasingly a distant and complicated goal for most Portuguese people. However, there are small habits that you can adopt that help in this mission.
This article, brought to you by ComparaJá, aims to help you through this process, which raises a lot of questions but also has its own myths and assumptions, which we want to demystify. Furthermore, you can also count on some savings tips to make it easier for you to include this expense in your monthly budget.
Is this the right moment to buy a house?
This is a very relevant question even before the house search. The right moment will differ a lot from person to person: it may be the first property you buy, or it may be that you want to move houses because your family will increase and the need arises. Essentially, the main concern is whether your household is ready for this burden.
It's important to think about your monthly budget and map out all the expenses you have, as each cost will greatly influence your ability to afford a mortgage. If you find that you can't save much money each month, maybe now is not the ideal time to buy a house. You might consider renting one until you can afford to buy your own, but make sure that the rent is really lower than the monthly mortgage payment you would have.
The financial stability to take out this kind of loan comes a lot from your professional situation or even the availability of equity with which you can pay the initial down payment on the house. If in any of these criteria you feel you can afford the costs involved in the purchase, then it may be a sign that you are in the right moment.
Relating to costs, there are to some extent some myths that need to be countered. While saving for the initial down payment and monthly credit fee is very important, the truth is that there are upfront costs that many people don't realise until the moment they have to sign the deed to the house. Let's look at each of them, why they exist and how you can save money to cover these expenses.
What costs are involved in the purchase of a house?
It is true that thinking that we only have to save the 10% down payment on the mortgage is a common mistake among the Portuguese people. There are several other costs involved at the time of the deed. These can be divided into four categories:
- Down payment
- Registrations and notary fees
Let's look at each of them and understand how much they will weigh on your wallet.
1. Down payment
The so-called "down payment" will always be the cost that weighs most heavily on your wallet in the short term, since it represents a large amount of money that you will have to provide immediately. In Portugal, the only situation in which you will not have to make a down payment is when the property is owned by the bank, as in this case there is the possibility of 100% financing.
Banks usually set a maximum limit of 90% for financing, but this percentage does not apply in all cases. This means that you have to pay at least 10% of the appraised value or purchase price (the bank chooses the lower of the two) of the property.
Using a practical example, imagine that you would like to buy a house whose acquisition price is 200,000 euros. The bank would finance, at most, 90% of that value, i.e. 180,000 euros. The remaining 20,000 euros would be what is called the down payment on the house, the initial capital you would have to pay when you buy the house.
It is this amount that often scares people when it comes to buying a new home, because it involves accumulating and saving a lot.
2. Registrations and notary fees
These are the costs that often go unnoticed, as they are expenses related to bureaucracy at the very moment of the deed of the house. The deed itself is a very volatile cost, since it depends on several factors such as the price of the house, whether it is for your own permanent residence or not, and in many cases there is no pre-defined table of costs.
You can formalise the purchase process in a notary's office, in a land registry office, or even by using the Casa Pronta service. If you choose the latter, you will already have an idea of the prices charged. For registrations only of the building itself (without recourse to a mortgage), the cost is 375 euros. However, if it's a financed purchase, the registration will cost you 700 euros.
If you execute the deed at another service or location, the prices may vary. According to information on the Portuguese Justice Portal, if you go to a notary or a registry office, the total cost involves three different elements: the certificate (which should be around 20 euros), the registration of the deed (around 225 euros) and the amount to pay for VAT (Value Added Tax).
You also have the option of having the whole process done by a lawyer or solicitor. Generally, banks have agreements with registry offices and present their own lawyers, who will be able to register the purchase of the house. In this option, you will have to make two separate registrations, which will cost up to 500 euros altogether.
The payment of taxes is a cost that may go a little unnoticed but that has a significant weight in the amount you will initially pay for the house. There are three taxes that you will have to account for in this process:
- IMT (Municipal Property Transfer Tax)
This fee is charged whenever a house is purchased. The IMT calculation takes into consideration the type of property, the location of the house, the purpose of the purchase and the rate applied (which varies between 1% and 8%). It can be calculated following the formula below:
IMT = Deed Value or Taxable Asset Value (whichever is greater) x Rate to be applied - Portion to be subtracted
You can check the IMT table to understand which rate may apply. It is possible to be exempt from this tax if the house is destined to be your own permanent residence and if the value of the property is less than 92,407 euros in the mainland or 115,509 euros in the Autonomous Regions of Portugal.
- IS (Stamp Duty)
Like the IMT, this tax is always charged on the purchase of a property, and you will have to pay it at the time of the deed. To know the amount to pay you will have to multiply the higher of the two amounts, either the deed amount or the Tributary Patrimonial Value (VPT), by the Stamp Duty rate of 0.8%:
IS = Deed amount or VPT (whichever is greater) x 0.8%
If you take out a mortgage, this fee is applied in a second charge. The calculation is made by multiplying the value of the mortgage by the Stamp Duty rate. If the payment period is longer than five years, the rate to be applied is 0.6%. If it is less than that period, then a rate of 0.5% is applied:
IS = Deed amount or VPT (whichever is the highest) x 0,6%
- IMI (Municipal Property Tax)
Finally, there is the IMI, which is paid every year from the moment the consumer buys the property. The amount of tax payable varies greatly from region to region, as each municipality sets its respective rates, which vary between 0.3% and 0.45%. The payment of this tax takes place in the month of May; however, there are possible splits of this collection.
If the IMI does not exceed 100 euros, payment must be made in full in the month of May. If the amount is between 100 and 500 euros, you can choose to pay in two instalments, in May and November. In the ultimate case, if the amount is more than 500 euros, then it is possible to pay the IMI in three monthly instalments, in the months of May, August and November.
As with the IMT, it is also possible to be exempted from this tax, either temporarily or permanently, if you meet the necessary conditions.
For the temporary exemption, the property will have to be for your own permanent residence, and it applies if the Patrimonial Value is not more than 125 thousand euros and also if the taxable income of the family unit is less than 153,300 thousand euros for IRS purposes. In the case of the permanent exemption, the household's annual income must not exceed 15,469.85 euros, which represents 2.3 times the annual amount of the Social Support Index (2.3 x 480.43 euros x 14 months).
The last costs you will have to account for are the commissions paid to the bank that granted the loan to buy the house, in case you do resort to a mortgage. Financial institutions charge for certain services associated with the credit application, either initially or throughout the interest payment. Let's focus on the initial commissions you will have to pay at the moment of purchase:
- File commission: also called opening commission, it encompasses the several costs of the process analysis, and the amount to pay is variable, depending on the bank itself and the property evaluation.
- Evaluation commission of the property: the evaluation is useful, as it lets the financial institution know, in a trustworthy way, the value of the house for which you are asking for credit. The bank usually charges a commission of around 200 euros for this service.
- Formalisation commission: this is paid when the loan contract is formalised, to cover the administrative and bureaucratic costs of the bank during the process.
Each of the above commissions is charged only once. If you take out a mortgage, there is another fee that adds to the total cost of the loan, which is the instalment processing fee. This is paid every month, together with the monthly instalment, for the whole duration of the contract.
There may be other commissions applied to credit contracts, depending on the financial institution or even the location of the property itself. You should always consult all the costs inherent to the process before going ahead with any proposal.
Are there other costs?
The expenses we have presented above are those that any buyer can expect once they decide to buy a house. However, there may be additional costs to the whole process that should not be left out of your budget. Of course it depends a lot on each case, but there are certain expenses that we can already foresee.
One task that should be included in this planning is the moving. Will you need to hire someone to help you move houses, or can you handle this yourself? If it's the first option, you have to account for those costs. It may also be necessary to find furniture that's more suitable for your new home, if it does not come previously furnished.
If the house needs some final adjustments, in case you want to paint it to your liking or make another kind of remodelling, you should also plan with those costs in mind. Essentially, it is necessary to think about what you will have to do once you have the keys in hand and foresee additional costs, so that you are not surprised with the money that's left in the end.
What can you do to save money?
Now that you are aware of all the costs you can expect in the process, it's time to start planning and reformulating good saving practices. Buying a house is the biggest burden many people will ever have to pay, so it requires some transformation of your personal habits. We have six tips for you that can be crucial in this process:
#1 - Set aside a percentage of the salary
Putting aside a certain amount of your salary every month is a recommendation you will hear a lot. The recommended amount is between 10% and 20% of your salary, depending on your financial situation and the costs of the desired property. By doing this every month, at the end of a few months you will have a considerable return on savings that you can use on your planned expenses.
#2 - Create an emergency fund
Keeping a certain amount of money for possible emergencies is always a good habit. We should have the financial stability that allows us to deal with different kinds of unforeseen events, like for health expenses or even to get the car fixed in case of a breakdown. Having that pocket of financial security is crucial these days.
For buying a house, this practice becomes a very important weapon. If you already have an emergency fund, you can take advantage of it for the purchase of a new property. If not, and if you are really thinking about buying a house, this is the best time to start adopting this practice.
Just pay attention to this: don't spend everything on the purchase of the house, since unforeseen costs, as the name indicates, can arise at any time. You should never be too financially vulnerable when facing a big burden like a mortgage.
#3 - Review expenses and renegotiate contracts
Take a good look at your financial situation and review costs related to services such as water, electricity, gas, television and internet, car insurance, as well as food and welfare expenses. Making a responsible use of the resources and services you have contracted is essential to optimise your monthly budget.
Buying a house is a burden that will, involuntarily, alter your monthly budget. Several costs will have to be rethought to open up some budgetary slack to allow for a charge of this size. This is where you'll have to plan your next few months very well.
After reviewing your monthly expenses, you may find some opportunities to renegotiate contracts in order to obtain more advantageous conditions. Thus, you should periodically evaluate and compare the offer in the different services, so that you are aware of the most competitive prices.
#4 - Renegotiate salary
Is your salary adapted to your needs?
Apart from renegotiating the amount itself, there are ways to optimise the compensation your company gives you, so that you can earn more at the end of the month.
Have you heard of flexible benefits? This is a solution that allows the company to allocate part of your compensation to a separate balance, which you have access to through a specific card and app. This balance can be spent in different categories, from childcare vouchers to health, gym and training expenses, among others. It is exempt from Social Security contributions and, in some cases, also from IRS. In the end, you save at least 11% every month.
The company also stands to gain, as it benefits from tax exemptions too. You can find out more about this solution and pass the information on to your Human Resources manager by clicking here.
#5 - Change consumption habits
If you have several expenses that are more complicated to renegotiate, you should start thinking about changing your consumption habits. Often, avoiding wasting water or even air-conditioning your home in an intelligent way can be solutions that result in significant savings at the end of the month.
Making a responsible use of electricity and gas, for example, for a few months can already make an immediate difference in your budget. Moreover, these saving habits will be very useful from now on. For example, by using more sustainable appliances, such as LED light bulbs, you can reduce your energy costs.
Another question you'll need to think about regarding your spending habits is whether what you're buying is really necessary. Making your typical shopping list with this in mind can help reduce your out-of-pocket expenses at the end of the month. It's in the little details that savings are achieved.
#6 - Think long-term
Taking out a mortgage is something that will require long-term planning, since you'll be paying this loan back over several years. So your budget will have to change, not only before you buy the house, but also after you pay the down payment.
Saving for the down payment and the initial costs of a house is already a complicated task, but we can't forget the costs we'll have in addition to the credit ones. These include energy, telecommunications, water or even possible changes to the house. By planning previously, you can already calculate all the expenses that will weigh on your budget.
This long-term thinking can even be applied to other issues: for example, if you want to sell your house in the future. Here you will have to think about the factors that influence what you can earn from the sale, mainly the location and how this affects the house in terms of accessibility or even the IMI amount.
If buying a house still seems like a distant vision, this short guide can serve as an introduction to the whole process. It is true that there are a lot of costs that accumulate, and the amount to be paid in the end inflates due to this. Planning with some margin is important, and always expecting that some costs may increase is also relevant, to prevent some inconvenient occurrence.
Of course that all situations are different. Different people will be looking for different houses that best fit their needs. However, whether it's the savings tips provided or your own saving habits, it's always possible to build up money that helps you prepare for the initial costs of a house.
It is also important to compare different credit solutions so that you get the best offer, already thinking about the future in your new home. This ends up being the biggest burden of your life, so starting to compare and save now gives you more preparation for all the costs that may arise.