What is mortgage subrogation?

Mortgage subrogation consists of replacing the debtor or the financial institution in a mortgage loan. That is, when someone wants to subrogate a mortgage, the process will include substituting one of its two agents: the lending creditor or the borrowing debtor.

Consequently, it is possible to subrogate the mortgage to another person, both when carrying out and assuming its payment and when collecting or managing its payment.

Therefore, there are two types and situations in which it can be applied:

1. Change of financial institution or creditor subrogation
2. Replacement of the mortgage debtor or debtor subrogation

The creditor subrogation is usually known because it involves the transfer of a mortgage to a different bank than the one previously listed with the aim of obtaining advantages in financing such as lowering or changing the interest rate (from variable to variable, from variable to fixed, or from fixed to variable), the reference index, extending or reducing the loan repayment years, eliminating certain fees, linked products such as insurance or other types of clauses.

To process it, it is necessary to meet certain requirements such as being solvent and having a stable economic and employment situation (permanent contract and seniority), having paid the installments to the previous bank for 2 years at the stipulated time, and that the outstanding capital does not exceed 80% of the value of the property.

However, a debtor substitution can also occur. This happens when a property with a mortgage is sold and a change in the loan holder must be made, that is, the name of the seller of the property must be changed to that of the buyer. This is known as a sale with substitution.

This procedure must be evaluated by the financial institution, and it is the new holder who will assume the debt. Thus, the seller benefits from savings on the costs of mortgage cancellation and the buyer saves on fees such as opening or valuation of the property.

In the case of a change of debtor, the bank must consent. Why? Because for the bank, who the debtor is is fundamental; it has granted the loan after conducting a risk assessment of that person. If the debtor is changed, the new one may present more risk or a profile that harms the banking institution, therefore, it will be necessary for the bank to give its consent.

And if the bank does not consent to the change of debtor? In this case, the party liable to the bank will be the previous debtor, not the new one. This means that the subrogation will not release the former debtor and the bank may demand payment from them. However, if the former and the new debtor agreed on the subrogation (without the bank's agreement), the former may demand from the latter the amounts paid following the bank's claim, but that is another story.

Both formulas generate a series of expenses that we must analyse before making a decision on the matter. Usually, mortgage novation is usually cheaper: its expenses and commissions are lower. The bank acts this way because, compared to mortgage subrogation, it ensures the retention of the mortgaged client.

However, we cannot force the financial institution to accept a mortgage novation, which does happen when we propose a subrogation. For this reason, it is common for an attempt at mortgage novation to end up forcing the client to subrogate the mortgage. In many cases, the creditor's refusal to modify their initial conditions is usually the main reason for resorting to mortgage subrogation.

Therefore, the main advantage of mortgage subrogation due to change of debtor or creditor is its unilateral nature. The financial institution cannot refuse. As a counterpart, it is more expensive and requires agreeing on new conditions with the other party.

In any case, before subrogating the mortgage, we recommend having information about a possible novation and comparing options.

In both situations, for either alternative, it is necessary to go to a Notary to formalise the agreement in a public deed.