Any modification to the original terms of a mortgage loan is done through a Mortgage Novation. It is a renegotiation of the credit granted by the bank, and it is completely legal and valid.
Basically, a mortgage novation is an agreement between the mortgage debtor and the bank. It is done to change one or more conditions of the original mortgage loan, either to improve them or adapt them to current circumstances.
It is a legal avenue used to avoid canceling the existing contract and formalizing a new one. Instead, there is simply a renegotiation of key elements of that contract, such as:
A mortgage novation is more commonly used in commercial real estate transactions. This doesn't mean residential contracts don't use it, just that it's less common in this market.
A novation can be easier to perform in a residential transaction because it generally involves fewer parties: buyer and seller. Let's look at how some forms of novations work in the real estate sector:
In each of these scenarios, the new contract will replace the existing one through novation. In the first two cases, transferring the responsibilities of the existing contract to a new party may be preferable.
This could also improve a company's reputation and credit rather than canceling a contract or defaulting on a loan. Terminating an already signed agreement can lead to undesirable consequences.
The best approach will always be an attempt to renegotiate terms or substitute one of the parties. In a home sale, an inspection contingency can provide more leeway to terminate the contract.
This does not incur financial consequences, such as the return of the earnest money deposit to the seller. However, depending on the market, the buyer or seller might prefer a transaction through novation.
When a novation transfers a mortgage or other financial obligation to a third party, you must be very careful. The lender will likely require a thorough financial and background check of the buyer.
Among the most notable advantages of novating the mortgage we can mention these:
You might be interested in: what mortgage subrogation is.
To proceed with a novation, you need to follow some essential steps and verify other important details.
Before requesting a mortgage novation, you need to know the details of your current loan. Review the contract and check elements such as interest rate, amortization period, monthly payments, and fees.
Analyze offers from other financial institutions and the conditions of the entire real estate market in general.
If you've decided to request a novation because it's beneficial for you, you should contact your current financial institution. Inform them of your desire to change the loan conditions.
Begin new mortgage negotiations with the bank, and don't forget to consider the elements you want to improve.
Make sure you have considered the subrogation fee, as these costs could alter the benefit of the novation.
If you reach a satisfactory agreement with the mortgage bank, you must go to the Notary as soon as possible and sign the preliminary deed. Afterwards, you can execute the novation deed.
Once you have formalized the novation, all the terms of your mortgage will be modified in accordance with the terms discussed in the new contract.
You might be interested in: mortgage renewal.
Novation can allow for the following changes:
In other words, the interest rate you are paying can be changed. This can be from variable to fixed or vice versa, and doing so in a timely manner could, in some cases, lead to significant savings.
Put differently, you can modify the period over which you must repay the money the bank lent you, and you can extend or shorten it.
Although similar to the above, this involves agreeing to repay the money early, and it's done when the client has savings and wants to pay a portion of the money back to the bank in advance. In this way, the amortization or repayment period is also reduced.
You can request the removal of some conditions that were initially associated with the loan.
If agreed upon, you can obtain more financing without having to apply for a new loan or any other type of credit.
Any collateral you offered when your loan was agreed upon can be changed when you request it. Naturally, this requires an agreement with the bank, which will likely require new collateral or its equivalents.
If you are unable to meet your payment obligations, you can ask the bank for a grace period. This means temporarily suspending payments, either fully or partially, for the loan during an agreed-upon period.
It may happen that after signing the mortgage agreement, you discover some clauses are abusive. In such a case, you have the right to ask the bank to remove these clauses.
Novation, understood as the legal mechanism that allows renegotiating the terms of a mortgage agreement, can be requested under certain circumstances. For example, you can request it when:
Novation fees generally range between 0% and 1% of the loan amount. They also represent the commission charged by the bank for the transaction.
Eventually, for a novation involving a capital increase, you will also have to pay, which amounts to approximately 300 euros on average. These are the expenses you must pay.
But the good news is that most of the costs related to mortgage novation must be paid by the bank by law. Here's a bit more detail:
The commission for this, whose price is indicated in the mortgage deed, can be between 0% and 1% of the amount. However, it is subject to legal limitations that the bank must respect.
Home appraisal, which costs around 300 euros, according to the appraiser. You need it because the bank may want to update your home's value to assess whether to approve the novation.
According to Law 5/2019 and the Directorate General of Taxes, these are the expenses the bank must pay when modifying a loan using novation:
Notary fees, which cost between 0.2% and 0.5% of the loan amount.
Property Registry fees, which average between 0.1% and 0.25% of the amount.
The administrative agency fees, which can range from 300 to 500 euros.
The IAJD, or Stamp Duty on Documented Legal Acts, costs between 0.5% and 2% of the increase in the mortgage price. This applies to interest, principal, or other amounts related to the modification.
Among the disadvantages that novation entails, we can mention:
To proceed with novating your mortgage, first consider if it's a better option for you, but also, follow these tips:
Basically, this modification of agreed-upon terms in your mortgage with the same bank could be more economical. This is because subrogation involves changing banks.
Potentially, novation avoids the expense of a new appraisal or cancellation fee. On the other hand, subrogation could offer better terms if you are looking for a change of bank.
Ultimately, choosing between novation or subrogation will depend on what you've planned to improve your debtor status. It's simply a matter of weighing your desired outcome against the implications of either of these legal options.
Yes, you can indeed get a novation for your mortgage, even if you have a mortgage with benefits.
Banks that allow mortgage novation include:
Yes, a mortgage novation can indeed change the mortgage term, among other things.
Yes, a novation allows for the removal of a borrower, provided the bank agrees.
Legally, there's no limit to how many times a mortgage can be novated, but keep in mind that each novation incurs a cost.
Generally speaking, it's not possible to do a mortgage novation if you are in arrears.
The process of mortgage novation can take between one and three months. The delay will depend on the complexity of the negotiations and the bank's speed in processing your application.
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