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Novation and Subrogation of a Mortgage (Remortgaging)
If you have a mortgage on your property with a higher interest rate than the current one offered you by any bank, the Subrogation and Novation Act 2/1994 of 30th March, gives you two possibilities of modifying it: the subrogation and the novation of the mortgage.
The subrogation entitles you to change your actual lending bank for another bank with a better offer in interest rates. Novation of the mortgage entitles you to renegotiate with your actual lending bank your existing mortgage in order to obtain more favourable terms and conditions.
With these legal instruments you can achieve the following:
- Modify the applicable interest rate (e.g. drop it from 13% to 6%)
- In variable interest rate loans, you can change the reference index (which is the basis for calculating the interest rate applicable every year. E.g.: in Spain, change the IRPH to the Mibor-Euribor)
- Change a fixed interest loan for a variable interest loan, and viceversa.
- Alter the repayment schedule by means of novation.
Before you approach another bank, attempt to renegotiate the terms and conditions of your existing mortgage with the lender. If the answer you obtain is not satisfactory, check other banks´ loan conditions.
Once you decide which bank offers you the best conditions, the procedure is as follows:
- Apply for the subrogation of those better conditions to the new lender and have it approved.
- The acceptance of the subrogation entitles the new lender to notify his improved offer and to apply for a certificate from the current lender with the balance of the mortgage pending repayment. The first lender has 7 days to issue the certificate.
- Once the certificate has been delivered to the new lender, the current lender has 15 days to improve the terms and conditions of the new lender (new bank). If he improves or equals the terms and conditions of the loan, he is bound to apply those new terms and condtions to that loan. (Novation)
- If the current lender cannot equal those conditions, the subrogation procedure will continue to be processed without any negative repercussions for the applicant in the event of a dispute between banks.
- Regardless of whether novation or subrogation of the loan takes place, the bank will arrange an appointment at the Notary´s office in order to sign the Public Deed. In the event of novation, a private contract is enough (reducing considerably the costs), unless the modification amounts to a change from fixed interest rate to variable interest rate, or viceversa, or a change in the index applied to calculate the interest rate. Novation on the basis of a private contract is possible only when altering payment schedule.
You need to consider the following costs and savings:
- Early repayment comission in variable interest rate loans can never be higher than 1%.. In fixed interest rate loans, there is no legal limitation, but bank have undertaken not to charge more than 2.5% of the mortgage capital.
- If you agreed a lower ERC (early repayment commission), the current lender will have to apply it, and where no ERC was agreed, no charge will be applicable in this regard.
- Both subrogation and novation are exempt from Stamp Duty (0.5%).
- Notary and Land registry fees are cut down by half, in both novation and subrogation. Also, since these fees are calculated on the basis of the balance of the mortgage, it works out cheaper. Consider both fees to be under 75.000 Ptas.
*APPROXIMATE NOTARY, LAND REGISTRY AND LEGAL FEES FOR MORTGAGE LOAN SUBROGATION AND NOVATION (where applicable).
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Balance of mortgage capital (Pts)
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Notary Public Costs (Pts)
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Land Registry Costs
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Legal Fees**
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TOTAL COSTS (Pts)
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1.000.000
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28.000
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9.500
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40.000
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77.500
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2.000.000
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30.000
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10.500
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40.000
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80.500
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3.000.000
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31.500
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11.500
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40.000
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83.000
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4.000.000
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33.000
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13.500
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40.000
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84.500
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5.000.000
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35.000
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15.500
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40.000
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90.500
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6.000.000
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36.500
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16.000
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45.000
|
97.500
|
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7.000.000
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38.000
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16.500
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45.000
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99.500
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8.000.000
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39.500
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17.500
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45.000
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102.000
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9.000.000
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40.500
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18.000
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45.000
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103.500
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10.000.000
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41.000
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18.500
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45.000
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105.000
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15.000.000
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43.000
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20.000
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60.000
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123.000
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20.000.000
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45.000
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22.000
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80.000
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147.000
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25.000.000
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47.000
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24.000
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100.000
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171.000
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* The borrower will add Early Repayment Commission on top of the TOTAL COST figure. (existing loan) Likewise, Mortgage openning commission for the new loan will be applicable, although subject to negotiation.
** Legal fees are likely to vary from one manager to another. This is an average figure.
Both novation and subrogation are tools which will allow you to reduce the cost of your mortgage. To calculate what the gain will be, the above costs must be substracted from the potential saving the new lender can offer you with his new interest rate conditions.
EXAMPLE
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Example of a saving done by changing the actual lending bank and reducing the interest from a variable interest rate mortgage currently at 5,647%, with a capital pending repayment of 9.000.000 Ptas. on a 10 year period. The early repayment cancellation is of 1% of the capital pending repayment.
The new bank offers the following conditions:
Interest rate: MIBOR + 0.7% annually /
1st year: 3.21% annual interest rate
2nd year: 3.45% annual interest rate (the following years taking as a base for calculation MIBOR of April 1999, although is subject to fluctuation).
Opening mortgage commission: 1.3% (9.000.000) = 120.000 Ptas.
Notary Fees: 40.500 Ptas.
Land Registry fees: 18.000 Ptas
Legal fees: 45.000 Ptas.
Doing the pertinent calculation, the computer arrives at a potential saving of 9.671 Ptas. per month on the installment of the first year, and 8.624 on the following.
Putting these figures on a lump sum, the saving offered by the second lending bank on the remaining mortgage capital once deducted the costs of cancelling the existing mortgage and the costs of the new mortgage is of 1.042.792 Ptas. More than enough to refurnish your property!
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