What is a mortgage novation?
Do you know what a mortgage novation is and if it allows you to modify the conditions of your mortgage loan? If you are unaware of this information, this article will interest you.
What does a mortgage novation mean?
Below, we will see the definition of the term mortgage novation.
Mortgage novation is any change made to the conditions of a mortgage when the corresponding payment has not been completed. The client usually requests it when they have problems paying, as it involves a renegotiation of the conditions with the bank.
However, today it is more frequently used in cases such as, for example, the change of mortgage from a variable interest rate to a fixed interest rate.
The concept is detailed in Law 2/1994, of 30 March, on subrogation and modification of mortgage loans. Thus, this term refers to "any subsequent change made to the conditions of the loan".
When is it necessary to carry out a mortgage novation?
Now that you know what a mortgage novation is, we want to explain when it happens. This procedure is requested when we want to make modifications to any of the following aspects of the mortgage:
- Interest rate: when the bank grants us the loan, an interest rate (fixed or variable) is signed, which can be changed according to the client's needs. To do this, it is necessary to renegotiate again with the institution. In the article “Changing mortgage from variable to fixed interest” you can find more details, but we can tell you in advance that with this novation it is possible that you can save money every month on your mortgage at no cost. You can read it below:
- Loan holder: means that a person other than the one who took out the mortgage takes responsibility for its payment.
- Repayment term: for a longer or shorter period which will change the amount to be paid in each instalment.
- Outstanding amount: there is also the possibility of increasing the loan granted.
- Settlement system: it may happen that the client has a grace period and cannot afford to pay the mortgage. In this case, a novation of the mortgage loan can also be carried out.
What reasons can cause a mortgage novation?
Modifications to the mortgage loan can be made for various reasons, so we will try to set out those which, frequently, cause the novation of the mortgage.
Economic Difficulties of the Borrower or Particular Economic Situations
Firstly, we could talk about a change in the economic capacity of the borrower. The owner of a property is going through financial difficulties and seeks to reduce the monthly instalments they have to pay, for which they will extend the loan and lengthen the repayment term of their mortgage to make their finances more sustainable. Likewise, it may also be that they try to obtain a mortgage novation to incorporate other debts or loans into it and manage to improve the interest conditions.
Change in interest rates
It is also very common for the novation of a mortgage to occur due to a change in the interest rates of the loaned capital. When taking out a mortgage loan, one can choose fixed or variable interest rates, with variable being somewhat more common. Thus, in these mortgage loans with a variable interest rate, the amount will vary depending on the evolution of its reference index, which is usually the Euribor.
On the one hand, we find that the novation of a mortgage can be due to the modification to reduce the variable interest rate, but also for a change of modality from variable to fixed or vice versa. This occurs, therefore, to achieve a reduction in the monthly payment of the buyer's debt on the property.
Benefits of the fixed interest mortgage
Among the benefits of fixed interest mortgages, we find that they provide a constant monthly payment throughout the loan, but this may mean a higher payment than a variable interest rate.
Among its benefits, we find stability of monthly payments and achieving better financial planning by knowing exactly what must be paid each month, as its financial risk is lower due to the absence of fluctuations in the payment. Therefore, from JLA Notarios, we consider that in most cases it is safer to have a fixed interest mortgage than a variable one.
Advantages of the variable interest mortgage
Although variable interest rates cause continuous fluctuations in mortgage payments, their conditions in the loan offer advantages such as lower interest rates in certain economic scenarios and, therefore, the reduction of the mortgage payment compared to fixed interest loans, providing a greater potential for long-term savings. What happens is that variable interest can be cheaper at times than fixed, but having a fixed interest mortgage is usually safer.
Advantages achieved by the property or client
However, situations may also occur where the property has increased in value and the owner wishes to take advantage of this new value to obtain more favourable loan conditions or where the bank wants to modify the contract for strategic reasons such as retaining a valuable customer.
Advantages of mortgage novation
We have already seen what a mortgage novation is and why it is advisable. The advantages of a mortgage novation are several:
The first of these is the savings on mortgage novation costs it represents for the client. Furthermore, carrying out a mortgage novation is more economical than a mortgage cancellation, since a cancellation leads to a series of expenses and consequent payments. Additionally, in the case of a novation, it may be possible not to have to revalue the property if all we want is to have the interest rate reduced. This also implies a cost saving by reducing mortgage novation expenses.
Another of the advantages of mortgage novation is that it is possible to improve the mortgage by negotiating with the bank more favourable conditions that involve reducing our mortgage expenses. This includes modifying the interest rate downwards or changing from a variable interest rate to a fixed one and vice versa.
Frequently asked questions about mortgage novation
In the event that the modification of the parameters established in your mortgage finally takes place, you should know that as long as the loan amount does not increase, you will not have to pay the Stamp Duty.
In cases where Stamp Duty must be paid, you should know that the tax will be paid by the bank, so the person who has a mortgage will not pay this tax.
In the case of the Tax on Documented Legal Acts, it shall not be payable in its gradual form in novations affecting the interest rate or the repayment term.
Indeed. Your financial institution may charge a fee if you modify the terms of your mortgage, provided this is stated in the mortgage loan contract. The fee for payment novation in loan modifications can be up to 1% of the outstanding balance.
They will not charge for novations involving a change from a variable to a fixed or mixed mortgage. In cases of mortgage term extension, the fee cannot exceed 0.1% of the remaining amount.
In this case, the mortgage is modified so that one of the owners becomes the sole holder of the loan. This usually happens in cases of separation or divorce.
The grace period of a mortgage can also lead to the creation of a mortgage novation. In this case, the agreement between the owner and the bank is indicated, whereby for a certain period, the payment of the mortgage loan or part of it will not be paid to the financial institution. Normally, only the interest is paid, and it is common to find this when owners are experiencing financial difficulties.
When can I make a novation?
It will be interesting to carry out a novation as long as the procedure allows you to reduce the cost of your mortgage, since you will obtain savings from the change in the interest rate. It may also be worthwhile to manage a mortgage novation if you start earning more money monthly and want to reduce the repayment period.
If you are considering a mortgage novation due to an increase in the interest rate caused by inflation, you may find this article about the new code of good banking practices useful. Approved in November 2022, it includes measures to protect middle-class mortgage debtors at risk of vulnerability due to inflation. In this article, we explain whether you can benefit from this reform and how:
JLA Notaries, for mortgage novations
Therefore, if you need to modify the conditions of your mortgage, do not hesitate to contact JLA Notarios, our notary office in Barcelona. We can guide and advise you in this process and thus you will better understand what a mortgage novation is. Do not hesitate to contact us without obligation through the contact form or by writing to bcn@jlanotarios.com.
We also recommend visiting our novation service before a Notary in Barcelona so that you can learn more details about how this procedure takes place at a Notary’s office and discover the mortgage products offered by JLA Notarios.
Applicable regulations:
- Legislative Royal Decree 1/1993, of 24 September, approving the Revised Text of the Law on Transfer Tax and Stamp Duty.
- Law 2/1994, of 30 March, on subrogation and modification of mortgage loans.
- Law 5/2019, of 15 March, regulating real estate credit contracts.
