Subrogation and novation

16/11/2022

The rise in interest rates that the European Central Bank began in July this year placed the reference rate at 2% in October. This increase is having a direct effect on the update of variable-rate mortgage loan instalments. The increase in instalments, together with the effect of inflation, is leading many families to adjust their budgets and consider reviewing their mortgage. In this context, many citizens are considering changing their mortgage loans from variable to fixed rate.

If this is your case, as we always advise, make sure you’re properly informed and assess all the options, both those offered by your bank and other options. You may find it useful to check out one of the simulators we have made available to you to calculate the new instalments.

If you decide to make the change, there are two possibilities: either you do it at the same bank where you took out the mortgage, or you decide to go to another bank:

• If you accept the offer that your bank may make, you will have to arrange a novation (change of conditions) of the pre-existing contract. Your bank must give you the pre-contractual information, the European Standardised Information Sheet (ESIS) and Standardised Warning Sheet (FIAE), at least ten calendar days before the date of novation. Given the importance of the modification, it tends to be formalised before a notary. The notary must offer you personalised advice free of charge.

Please note that your bank may charge you a fee if this was stipulated in the original contract, which is usually a percentage of the outstanding loan amount, subject to the limits set out in this table.

• If you find another bank’s offer more attractive, you can opt for a subrogation. This process is regulated and must be formalised before a notary. The new bank must provide you with a binding offer with the conditions of the new mortgage, with a minimum validity of 15 days. Once your old bank has been informed, it must provide the new bank with a certification of the amount of debt outstanding and it may make you a counter-offer modifying its conditions in order to keep you as a customer. This way, you will be able to choose the offer that suits you best.

Subrogation will also incur costs, which tend to be higher than novation costs and which will be specified in the original loan agreement and within the legal limits set out in this table.Abre en ventana nueva

Of course, you could also repay your mortgage early and arrange a new one, but this alternative generally involves more formalities and costs, since legislation favours novation/subrogation (limit on compensation/fees, lower registration/notary fees, tax benefits).

Take your time and consider all the variables: for example, a lower rate, but with a longer repayment term, may cause you to pay higher total interest over the whole agreement.

In any case, do not forget that mortgage loans are very long-term operations and can be affected by economic circumstances that are very diverse and difficult to determine over time, such as the evolution of interest rates, both in the coming months and in the longer term.