Refinancing a mortgage is an operation that consists of changing one or more of the conditions that govern an existing mortgage loan: mortgage interest, installments, payment term … Mortgage refinancing can be done in three different ways, each with its advantages and disadvantages:
1. Mortgage novation: consists of negotiating with your bank a change in the conditions of your current mortgage.
2. Mortgage subrogation: you transfer your mortgage to a new bank that offers you more advantageous conditions.
3. Hiring a new mortgage: you cancel the loan you already have to sign a new one.
Goals of refinancing a mortgage
As we have mentioned a few lines above, the main objective of refinancing a mortgage is to achieve conditions that, for one reason or another, are more advantageous for the debtor:
- Lower monthly payment: it is the most common reason to refinance a mortgage. Allows you to make a smaller payment each month. Of course, at the cost of increasing the repayment term and, therefore, the interest on the loan.
- Shorter repayment term: the objective of paying off the mortgage early is to reduce the amount of interest to be paid.
- Higher Available Equity – Having more borrowed equity is another major reason why many buyers choose to refinance their home loan. This extra capital can be used to pay other debts, new investments, etc.
- Change in interest rate: another reason why many bank customers are requesting mortgage refinancing lately. There are two options, opt for lower interest rates or change from variable to fixed (the most frequent) or vice versa.
- Improvement or modification of the clauses of the contract: change of holders, improvement in commissions and / or linked products, etc.
How to refinance a mortgage through novation
The first of the formulas to refinance is through a mortgage novation. It consists of negotiating with your financial institution new conditions for the mortgage that you already have contracted. Many times, the novation of a mortgage occurs after we try to take our loan to another financial institution: our bank counter-offers with conditions that we like and we keep our old mortgage, which sees its clauses modified through the novation.
The novation of a mortgage depends on the willingness of the bank to accept it. However, in many cases, it is the most appropriate option to refinance a mortgage since it is usually the simplest and the cheapest. In addition, and in comparison with the subrogation of a mortgage, it does allow to change almost any clause of the mortgage.
This method of refinancing the mortgage implies the modification of the contract and its registration, so it entails certain expenses for the owner: commission for novation (only in some cases), notary fees, Property Registry, and agency (and even appraisal if it is a capital increase).
Despite these costs of refinancing the mortgage, it is important to note that the cost of a novation is usually cheaper than that of subrogation or the cancellation and contracting of a new mortgage. However, it is advisable to do accounting to see if the savings obtained are large enough to compensate for the change.
How to refinance a mortgage through subrogation
The subrogation of a mortgage consists of taking the loan to another financial institution that improves its conditions (interest rates, commissions, repayment term and related products). Of course, it does not allow to change its holders or increase the capital.
It is a more complex process to refinance the mortgage than the previous one, because it involves finding another bank that improves the conditions of your first mortgage and also you have to have a profile that is attractive to the new entity. Likewise, their expenses are also higher, since those of novation must always be included those of the appraisal of the home.
Therefore, here it is also always advisable to carry out a study of the possible costs before starting the operation, comparing the subrogation with the novation and the cancellation and formalization of a new mortgage (especially in the case of a creditor subrogation).
The usual thing is that creditor subrogations (change of bank) are only carried out in the first years of the mortgage: as this is the period of time in which the greatest number of interests are concentrated, it is when the change is most profitable.
How to refinance a mortgage through cancellation
The cancellation of a mortgage consists of canceling a loan to subscribe a new one with better conditions. From an economic point of view it is the most expensive formula, since the expenses of hiring a new mortgage are added to those of paying off the old one. Therefore, it is the least recommended option to refinance a mortgage.
As a summary, we can say that if you are thinking of refinancing your mortgage, it is best to first negotiate with your bank to try to improve the conditions of your loan through a novation. In the event that this is not possible, you can try to find a better mortgage in another financial institution through subrogation (there is also the possibility that your bank will counter-offer you – in a non-binding way – this new proposal). The last option is, without a doubt, to cancel the loan to hire a new one.
