LISBON, July 2 (Reuters) - Portugal's central bank on Thursday urged banks to tighten mortgage lending rules for new homebuyers starting in August to prevent excessive household indebtedness as house prices soar.

Mortgage lending grew by more than 10% on a year-over-year basis in the first quarter, the fastest pace in more than two decades, and house prices almost tripled between 2015 and 2025, according to Eurostat data.

In the recommendation, which is not binding but is usually followed by lenders, the Bank of Portugal asked banks to lower the maximum debt service-to-income (DSTI) ratio for new mortgage borrowers to 45% from the current 50%.

As a result, banks should not grant a mortgage if a customer's total debt repayments, including mortgage payments as well as consumer and other loan instalments, exceed 45% of income.

In 2025, nine out of 10 new mortgages had a DSTI ratio above 43%, reflecting strong demand from young homebuyers following the government's introduction of tax exemptions and public guarantees to help them buy their first home.

The central bank also recommended that banks increase the maximum maturity of home loans to 40 years for borrowers aged 30-35, from the current cap of 37 years.

The recommendation aims to "promote prudent lending practices and help strengthen the financial sector's resilience while reducing the likelihood of household defaults" in a context of accelerating house prices, the bank said in a statement.

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