Many Spanish banks offer discounts on their mortgage interest rates if you purchase a life insurance policy and other products. While the lower rate may seem attractive, the reality is often different.
How does it work exactly?
Above, you can see an example quote from BankInter in February 2022. BankInter’s base interest rate is 3.2% (as shown in the bottom left of the image). In exchange for purchasing a life insurance policy, a bank account, and home insurance, you receive a 1.35% discount. Since you need home insurance and a bank account anyway, you focus on the cost of the life insurance policy. The bank informs you that the cost of the life insurance policy is 0.5% of the mortgage amount per year. The discounted mortgage rate is 1.85%. So, you calculate: 1.85% plus 0.5% equals 2.35%. Another bank offers 2.55% without any discounts or additional products. You may think you’re getting a better deal, but there’s a misconception.
Let’s say you borrow EUR 200,000 over a 20-year period with annuity payments. One bank offers a 1.35% discount if you purchase a life insurance policy. The mortgage interest rate is 1.85% instead of 3.2%. Now, let’s assume the life insurance policy costs EUR 1,000 per year. This corresponds to 0.5% of the mortgage amount.
The total costs would be 1.85% + 0.5% = 2.35%.
During the first year, the interest discount is 1.35% of EUR 200,000, which equals EUR 2,700. What happens after that?
As mentioned earlier, you make repayments on the loan each year. After 10 years, the remaining loan balance would be EUR 109,140. You would pay interest on this amount. The 1.35% interest discount would now be equal to EUR 1,473 (1.35% of EUR 109,140). Compare that to the discount of EUR 2,700 in the first year—it’s nearly halved.
You initially thought the mortgage would cost 2.35% (1.85% mortgage interest rate plus 0.5% for the insurance). What’s the situation after 10 years?
You still pay 1.85% mortgage interest. Additionally, you pay EUR 1,000 for the insurance. The remaining loan balance is EUR 109,140. EUR 1,000 insurance premium corresponds to 0.91% of the mortgage amount of EUR 109,140. So, your total costs would now be 1.85% interest plus 0.91% for the insurance, totaling 2.75%. After 15 years, your total costs would increase to 3.6% of the mortgage amount.
The chart below illustrates the cost evolution over the entire loan term. The loan amount is EUR 200,000. The interest costs decrease, while the insurance costs remain the same and become more significant.
The second chart compares the total costs of a EUR 200,000 loan with a 2.5% interest rate without a life insurance policy and the same loan with a 1.85% interest rate and EUR 1,000 per year for the life insurance policy (0.5%). As early as the 7th year, the loan without insurance becomes cheaper.
We calculated with a 0.5% life insurance premium for a policy that covers the entire mortgage amount, on average for a 40-year-old. The premium increases to 0.7% from the age of 50 and 1% above the age of 60.
The discount a bank offers on the interest rate decreases in euros each year. However, the costs of the products you must purchase to qualify for the discount remain the same. As a result, the loan becomes more expensive each year. In summary, the discount is not as advantageous as it seems.
With this article, we want to emphasize that if you want to borrow economically, be cautious with mortgages that require you to purchase additional products in exchange for a discount. A loan with a 2.5% interest rate without additional products can often be cheaper than a loan with a 1.85% interest rate and additional products, even if the total costs in the first year are lower than 2.5%. Consider whether you genuinely need the products and how much you are paying for them. Also, consider the percentage increase in the mortgage interest rate if you decide to cancel any of the purchased products. There are certainly alternative solutions for a Spanish life insurance policy linked to a mortgage.
Fynis International Mortgages mediates in mortgages from a bank where you are not required to purchase additional products. We have an alternative option with a relatively low base interest rate. After 4 years, you can cancel the life insurance policy with only a 0.25% increase in the interest rate.