Discounted mortgages are gaining popularity in the mortgage market. Their main advantage is lower interest payments and, therefore, a slightly lower monthly payment, but the truth is that they’re not always the best option. Learn exactly how a discounted mortgage works and how to assess whether or not it’s right for you.
Applying for a mortgage is the most common way to approach home buying, but how much do we know about them? There are fixed, variable , or mixed types, for young people, for groups, and even reverse mortgages. Over time, mortgage loans have become a complex financial product, and as savers, we must understand everything they offer to always choose the best option. Let’s take a closer look at how a subsidized mortgage works.
What is a subsidized mortgage?
A subsidized mortgage is a type of mortgage loan that offers a reduction in the interest rate in exchange for the user taking out one or more financial products .
It’s worth noting that both fixed-rate and variable-rate mortgages and mixed-rate mortgages can be discounted. Although their name may suggest they’re a new type of mortgage, they’ve actually been around for many years and are quite common.
Although they depend on each bank or savings bank, the types of products or services associated with a subsidized mortgage are:
· Payroll and receipts: Direct deposit of payroll, self-employed contributions or receipts
· Insurance: Taking out home, life, or payment protection insurance
· Expense: Credit or debit card application
· Savings: Taking out a bank deposit
· Retirement: Contributions to pension plans
How exactly does a subsidized mortgage work?
Subsidized mortgages have a minimum interest rate , or in other words, the maximum discount a bank will grant when lending money. This is usually 1% to 1.5% below the normal mortgage interest rate.
But be careful, most often, to fully apply it, we must purchase several products . In other words, each product linked to the subsidized mortgage offers a percentage discount. Let’s see this with an example.
The subsidized mortgage in numbers:
Interest rate (APR) of a non-subsidized mortgage: 3% APR
Interest (APR) on a subsidized mortgage: 2% APR if…
· Payroll direct deposit: – 0.25% APR
· Home insurance: – 0.25% APR
· Life insurance: – 0.25% APR
· Bank deposit: – 0.25% APR
As we see in the theoretical example, the hypothetical purchase of each product would reduce the APR by 0.25%, adding a total of -1% to the APR (thus going from 3% to 2%). But let’s suppose we already have life insurance and don’t want to take it out. In this case, the company would offer us -0.75% (i.e., 0.25% less for the three products we did purchase). Note that this is simply an example, and the discounts and percentages will vary depending on the company.
Everything you need to consider when evaluating or taking out these mortgages
By law, no institution can force you to take out any product when applying for a mortgage, except, of course, those designed to safeguard against collection of the account and potential damages, as well as payment accounts. This means that a subsidized mortgage should always be presented as an option or alternative to a conventional mortgage.
When deciding which one is best for you, it’s time to weigh things up and crunch the numbers. The truth is, a lower interest rate sounds like a great deal, but the reality isn’t always so rosy . Let’s look at everything you need to keep in mind when deciding whether it’s right for you or not.
One of the crucial factors here is the costs. All (or almost all) of the products associated with a discounted mortgage have a cost . Insurance, credit cards, and so on. You need to calculate their cost not only annually, but also for the entire term of the mortgage, since you’ll have to pay them off until you finish paying them off. It’s worth adding this up and comparing it with the savings obtained due to the interest rate reduction , as sometimes you’ll find it’s not worth it.
Another important point is the products we purchase. We’re not saying they’re bad, but they likely won’t have the most competitive prices on the market, or worse, their terms and conditions won’t be the best . This is especially true when it comes to insurance, where we may be able to find better-priced insurance on the market, with coverage that better suits our needs, or a combination of both. Remember, while it’s highly recommended to purchase comprehensive home insurance, residential properties only require fire coverage.
Finally, we can’t forget the penalty costs . Yes, it’s possible to cancel mortgage-related products, but that comes at a price. Most commonly, the interest rate and, therefore, the monthly payment will increase, but it’s important to read the fine print to understand what canceling a linked product means for your wallet before you’re surprised by any additional penalty.
Discounted mortgages also have positive aspects, of course. The first is that if total costs are kept low, discounted mortgages are an attractive long-term savings tool . Even if we don’t realize it, month after month we’ll be saving money that we would otherwise be spending directly on our mortgage payments.
On the other hand, a discounted mortgage helps build a stronger and closer relationship with the bank . Okay, yes, it may be a bit of a stretch at first, but over time (and with the installments paid), the bank will start to view us more favorably. This can be an advantage when dealing with paperwork or applying for financing in the future.
In short, a conventional mortgage offers you more freedom and flexibility when it comes to managing your money and peace of mind, while a discounted mortgage offers you better terms… although it’s a good idea to make sure this is the case.
Is this a good time to apply for this type of mortgage?
There’s no doubt that if the numbers add up and you don’t mind making a long-term commitment to certain aspects, a subsidized mortgage is always a yes. However, if you’re just going for the discount, you’ll be interested to know that the beginning of 2025 has been accompanied by the drop in the Euribor , which has led to a drop in interest rates . This, in turn, has shaken up the mortgage market, meaning banks are fine-tuning their offerings in order to sign the maximum number of loans. In fact, experts predict that throughout this year we should see the APR below 2%. So, if you’re looking for lower interest rates, you might want to wait a few months before taking out insurance or pension plans for a few tenths of a percentage point lower.
Financial tip:If you’re looking at options and it looks like you’ve already chosen a bank, we recommend checking out our tips for negotiating a mortgage . 🤓
This type of mortgage is for you if:
✅ You’ve done the math and it really pays off.
✅ You need or find the products offered useful (insurance, pension plans, etc.)
✅ You have a good relationship with the entity and would not mind strengthening it.
✅ You do not plan to move any financial products
The subsidized mortgage is not for you if:
❌ You’re just looking for savings and haven’t calculated whether it’s really worth it.
❌ If you don’t know the financial institution that offers it or you don’t trust it very much
❌ If you have already contracted the products offered by other companies and you do not want or cannot change
❌ If you don’t need the products they offer you
❌ If you have insurance with special coverage or bonuses that you wouldn’t want to lose
More about mortgages and other ways to manage your money
Now that you know the pros and cons of a subsidized mortgage, you might be interested in exploring other options, such as the differences between a mortgage and a home equity loan . And remember that at ViveMásVidas, you have a whole repository of useful content to learn how to better manage your money, where you’ll find savings tips, useful investment information, advice on preparing for your retirement, and much more. Oh! And remember, you can receive what interests you most directly in your email simply by subscribing.
