The expectations for this year, in terms of housing, point towards a continuous increase in interest rates and Euribor ratesas well as a reduced, and expensive, rental offer. Therefore, in times of uncertainty, it is necessary to do the math to figure out which option pays off the most. Lease or buy in 2023? Define your choice thinking about savings in the short, medium and long term. In this article, we try to show how much rent can cost in 2023, and how monthly installments of housing credits can evolve in the next year. So that you understand which option might make the most sense in your case. We took into account the measure established by the Government that limits rent increases to 2% from January, and still the current conditions that are practiced in housing credits.
How much can rents increase in 2023?
Maximum ceiling limited to 2%
The Government revealed a new measure for renting houses in 2023, which limits a maximum ceiling of 2% with regard to the increase in rent values, in housing and commercial spaces. The measure will be implemented in January and ends in December 2023, aiming to support families in more difficult times, with the general increase in prices due to the current inflation. By not implementing this measure, the rise in rents could go up to 5.43%, depending on the rent updating coefficient – a value defined based on the variation of the Consumer Price Index (CPI) in the last 12 months, which uses the values available on August 31 of each year. The measure is then applicable throughout all the months of 2023, however, it encompasses contracts longer than 1 year. That is, the 2% limit will be applied to tenants with contracts until December 2022, regardless of the amount involved. It begins to be applied as early as January 1, thus accompanying the renewal of lease contracts. As a result of this measure, the landlords will be compensated with tax benefitsin order to convey a “message of protection for families, but also for owners”, stressed the Minister of Finance, Fernando Medina.
What is the impact on incomes?
By limiting the increase in rents to 2%, the impact of the maximum ceiling on which rents can reach will be smaller. Let’s see the impact in real examples. According to the most recent data from the National Institute of Statistics (INE) relating to leases and referring to the second quarter of the year, each square meter has a cost of 6.55 euros. Which means that, for example, a motionless with 150 m2, has a rent of 982.5 euros. So, increasing the limited maximum of 2%, this tenant will pay an additional 19.65 euros in his rent. Which translates into an income of 1,002.15 euros. In the case of a property with 200 m2considering the 6.55 euros per m2, the rent already costs 1,310 euros per month. In this way, with an increase of 2%, the rent will be 1,336.20 euros, equivalent to another 26.20 euros every month. On the other hand, in a property where the area is larger, corresponding to 230 m2, the monthly lease costs 1,506.50 euros. And with an increase of 2%, it would cost 30.13 euros more per month, that is, this tenant would pay 1536.63 euros for his rent at the end of the month. Also read: Interest rates rising: Is it better to rent a house?
How can housing loan installments evolve?
Euribor rates continue to rise
At Euribor rates continue to rise and the expectation is that the trend will continue in 2023. This is a consequence of the high values of inflation in the various countries of Europe, which led the European Central Bank to increase the reference interest rates to curb the situation. The highlight of the biggest increase in this index goes to the terms of 6 to 12 months. How does this factor correlates with home loans? Because is one of the main indicators of this credit in Portugal, representing a reference rate used by the various banks in the European Union (EU) among themselves. Which means that when you have a variable or mixed rate in mortgage loans indexed to Euribor, the value of your monthly installment accompanies rate increases. Depending, however, on the term that has the rate. For example, if you have a 12-month Euribor, at the end of one year your installment is reviewed and updated according to the Euribor value in that period. The Euribor average has been increasing monthly. But, to understand how much this rate has risen, in February the value was negative, at -0.476%. Is on November, it already had a positive value of 2.321%which is expected to continue to climb.
What impact will it have on installments?
To analyze the impact that the increase in Euribor rates may have in your specific case, in your monthly installment of your home loan, we have put together some practical examples based on the Monthly Installment Calculator. For that, we must take into account the following factors: the Nominal Annual Rate (TAN) – equivalent to the average value of the current Euribor in the chosen term of your credit added to the spread percentage, and the property value (considering the average value of property sales per m2 of family dwellings by geographic location in the last quarter in Portugal, according to data compiled by INE). So, simulating a housing loan with a spread of 1.2% and a 6-month Euribor term in which the current monthly average value is 2.321%, you get a TAN of 3.521%. whereas the property is 150 square metersthere is a cost of sale corresponding to 210,300 euros (1,402 m2). In this case, if you have a repayment term of 30 years, in May it paid a installment of 603.66 euros, taking into account the average value of Euribor in that month of -0.144%. However, with the increase of this average value to 2.321%, if your installment has now been reviewed after the 6 months, now pays 675.33 euros. Which is equivalent to an increase of 71.67 euros per month in the installment of your credit. According to an analysis carried out by Euribor Rates, the forecast is that the Euribor will continue to increase, but not exceed a maximum ceiling of 5%. This is because, analyzing historically, this phenomenon only occurred twice: in 2000 and in 2008. And, since then, it has always been progressively decreasing, and in 2015 it entered negative values, remaining so until April 2022. what happens to the provision of this concrete example, if the Euribor reaches 5%. Considering the spread of 1.2%, the TAN of your credit stood at 6.2%. Which means I would be paying a monthly installment of 918.70 euros. 315.04 euros more per month than you paid in May for your home loan. Also read: Leasing or buying a house: How can the installment evolve?
Macro shot of increase in mortgage rate concept
Lease or buy: Which option makes more sense in 2023?
Lease and buy are two options with different processes, since, as a rule, one is cheaper initially and the other more affordable monthly. We then detail the upfront costs and monthly costs of each process.
initial costs
With regard to lease, the initial costs are related to the deposit that the tenant has to pay the landlord when signing the contract. This guarantee has The aim is to ensure that the landlord can protect himself from possible damage that the tenant may incur. in the property. In 2023, this deposit will be limited to two advance rents, maximum. It is a measure that comes from a proposal by Bloco de Esquerda to avoid abuse of guarantees, which are currently required by landlords from tenants when they sign the lease. That is, if the income is the 1,002.15 euros in the example above, in this case you would have to give 2,004.30 euros input. Already to buy a house with mortgagestill have to give at least 10% of the value of the house since banks do not finance 100% of the value of the property. For example, considering the cost of selling a property by 210,300, had to have equity of 21,030 euros for this effect. Mortgage credit: Savings tips for the initial entry In addition, count on the following costs: process opening (amount may vary depending on the bank): €550 Municipal Tax on Real Estate Transfers (IMT) (variable depending on the value of the property): €1,860 Stamp tax (0.8% of property value): €1,200 Deed (variable depending on the value of the property): €751 So, in initial process of buying a home with housing credityou need to have available, in total, about 25,391 euros (varies depending on specific cases). for what, in this first period there are higher costs to buy than for rent. However, as we explain below, this does not happen monthly, so it is a investment that can pay off.
monthly costs
So let’s see the difference between monthly costs in the two situations. Considering a T1 property in Lisbon with 180 square meters, your monthly rent is 1,184.4 euros (6.58 euros per m2 on the mainland, according to INE data). And taking into account the possible increases in 2023, with a maximum ceiling of 2%, income would pass to 1,208.09 euros. But comparing the same T1 property in Lisbon with 180 square meters, to buy with housing credit, with a payable period of 30 years and a TAN (Euribor+Spread) of 3.321%, the monthly installment is 790.40 euros. Considering a maximum increase of 5% of Euribor, the value of the installment can reach up to 1,079.19 euros. That is, even with the increase in interest rates reaching expected maximums, the value of the credit installment remains lower than the rents practiced in Portugal. This is mainly due to the fact that there are little supply on the rental market. So, at a monthly level, savings end up being highlighted when buying a house, more than in the lease, despite the investment required in initial costs. Also read: How to enter 2023 with a tidy wallet