What is a mortgage novation? Five basic recommendations before you go ahead
Feel as though your mortgage is no longer right for you? Perhaps you are paying too much interest or your instalments are higher than you can afford. Whatever the reason, there is a possible solution: you can change the conditions of your loan with a mortgage novation. This is a process whereby you renegotiate certain aspects of the agreement with your bank. If you are thinking about a mortgage novation, you should follow our recommendations to get the maximum benefit.
What is a mortgage novation?
This is the term used to refer to any amendment that results in a change to any of the terms of the original mortgage agreement. The process involves renegotiating certain aspects of the deed with the bank, agreeing upon new conditions and signing a new mortgage agreement in the presence of a notary.
Anybody can novate a mortgage agreement. However, you should remember that if the bank does not agree with the new terms you propose, it may turn down your request. It will only be obliged to change the terms if it has already committed to doing so.
Five things to consider before going ahead with a mortgage novation
1. Remember the novation commission
The first thing to remember is that you will have to pay the bank a fee for carrying out the process. Since the enactment of the Mortgage Act of 2019 the fee is 0.25% for the first three years of the mortgage agreement. However, after three years have elapsed, the commission is 0%. With this in mind, you should consider waiting until the fourth year to avoid paying this fee.
2. Repay the capital at the beginning of the mortgage
One of the advantages of a mortgage novation is that it allows you to reduce the loan by paying part of the debt to the bank early. The advantage of this is that you will pay less interest because when you reduce the capital repayable to the bank, you are also reducing the interest payable on that capital.
If you make this advance payment before you are halfway through paying the mortgage, you will make significant savings because, according to the French system, you pay more interest at the start of the loan.
3. Take advantage of low interest rates
Our third recommendation is to make the most of lower interest rates in your mortgage novation. You can switch from a variable to a fixed rate, for example. This is even more beneficial when interest rates are low (as they are at the moment). Likewise, if you switch to a fixed rate mortgage, fluctuations in the Euribor will not increase your instalments and you will not end up paying more than you had bargained for.
On the other hand, this process also allows you to apply to increase or extend the loan and obtain more money without having to complete all the formalities of a new mortgage or a personal loan. This is an attractive option when we need extra cash, because an extension through a novation can be more economical than applying for a new mortgage or loan, because you will avoid a whole series of associated costs and high interest.
5. Consider the possibility of a subrogation
As we mentioned before, you will need your bank’s approval to novate your mortgage. If your bank is not willing to allow this, you can opt for a subrogation.
In general terms, this entails transferring the mortgage loan to a different lender, at which time you can renegotiate the terms of the agreement. It is a good idea when the bank is unwilling to agree to the novation, because your new bank will want to take over its competitor’s customer. The new lender may offer you better conditions and be more flexible with the changes.
Costs of a mortgage novation
- Mortgage novation fee: this costs between 0% and 1% of the outstanding portion of the loan in fees for renegotiating the conditions.
- Notary fees: notary fees for carrying out the process vary between 0.2 and 0.5% of the final capital outstanding.
- Property Register: if changes must be made in the registry, you will have to pay 50% of the amount charged by the notary.
- Management office (gestoría): this expense will depend on the agreement with your bank and can be anything from 100 to 150 euros.
- Valuation: lastly, this tends to cost between 250 and 350 euros, and may vary depending on the type of property subject to the loan.
It is important to remember that not you may not have to pay all the above mentioned costs. Some of them depend on the type of change you want to make to your mortgage.