Novation, subrogation and cancellation of mortgages

Many mortgage holders in Mallorca, Menorca and Ibiza are looking for an improvement in the terms and conditions of their mortgage agreement. In most cases, a smaller monthly payment is considered the main objective of such investigations.

To achieve this objective, there are several different operations that can be carried out: novation, subrogation and cancellation of the mortgage.

Firstly, the Spanish term novation consists of changing the conditions of the mortgage without changing the bank/financial entity (only referred to as entity from here on) – carrying out a new negotiation with the same entity. With the subrogation or cancellation of the mortgage, the objective of improving the mortgage is also achieved, but these are operations that imply different things and change more than just the terms of the mortgage.

What is mortgage subrogation?
Subrogation consists of changing the involved parties of the mortgage. When we speak of subrogation to improve the mortgage itself, we are speaking of creditor subrogation, which consists of changing the mortgage from one entity to another (changing the holder of a mortgage to another is what is known as debtor subrogation).

The act of subrogation has a defined process and legal deadlines that begin with an offer for the mortgage from the potential new entity and which the current mortgage holder will have 10 days to revise. If the mortgage holder accepts the offer, the new entity will contact the old entity to request all the information regarding the mortgage and the old entity must concede this information out of obligation.

Once the documentation has been delivered to the new entity, the old entity has 15 days to make a counter-offer with better conditions than those of the new entity. If the holder accepts the counteroffer, this is considered novation (modification of the terms of a mortgage without changing entity or holder) instead of subrogation.

What if I cancel the mortgage?
Another option is to cancel the current mortgage and take out another new mortgage with another entity or in the same entity (although staying in the same entity is not common through this operation since what occurs is a novation by definition). In short, it is to pay what is left of the mortgage and to open a new mortgage with a new entity.

But we must also take into account that the cancellation of the mortgage implies the payment of the commission for withdrawal or early repayment which will be 0.15% when it is done within the first 5 years of the life of the mortgage loan and 0.25% if it is done in the first 3 years. It should also be taken into account that a commission for compensation of the interest rate risk may appear, which will reach a maximum of 2% if it occurs during the first 10 years of the mortgage and 1.5% from the eleventh year onwards.

Which option is better?
The key factor when modifying your mortgage in Mallorca, Menorca or Ibiza is calculating the cost of operations. In general, cancelling the mortgage and opening and contracting a new one from scratch has a higher cost (the cost of cancellation has to be paid to the entity and also notary and registry fees), while with subrogation these cancellation fees do not exist, in addition the total cancellation fee is higher than the subrogation fee.

With a mortgage subrogation it would be necessary to take on the subrogation fee (if there is one); when changing from a variable rate to fixed rate subrogation may not be more than 0.15% of the capital repaid in advance when it occurs in the first three years of the mortgage. After these first three years, the bank cannot demand a subrogation fee.

In fact, with the new Mortgage Law, the commission fees for the remaining subrogations disappear, although the notary, registry and appraisal costs must be paid. Therefore, the key is to do your research of the possible options for your situation and properly study and calculate the additional costs before making a decision.

Another very important factor is the negotiation of the mortgage loan, which can bring many economic advantages.

Should you require any assistance or legal counsel concerning properties, purchases and sales on the islands of Mallorca, Menorca and Ibiza, please contact us at your convenience at info@mallorcasolicitors.co.uk or by phone on the numbers listed on our contact page.

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