The subrogation of the mortgage in depth

The subrogation of a mortgage is a situation that can occur when we have a property shared with another person, in what we call co-ownership. There are other situations in which mortgage subrogation can take place, and we will explore them throughout our article. Today, at Gumper, we want to delve into the aspects that entail the need for mortgage subrogation, as well as the economic aspects that will arise from this operation.

If you are wondering “can I subrogate to someone else’s mortgage,” the answer is yes, but with one fundamental condition: the bank must accept the new holder. In practice, this means that the financial institution will assess your economic solvency, your job stability, and your level of indebtedness before approving the change.

This operation is technically known as debtor subrogation, and it is usually used in cases of divorce, separation, inheritances, or the buying and selling of properties with an existing mortgage.

When might I need a mortgage subrogation?

A subrogation of the mortgage occurs for different reasons, although there are three differentiated causes that stand out since the bulk of operations carried out in this regard are mainly attributed to two options:

• Modification of one of the property holders and therefore of their mortgage.
• Modification of the mortgage for financial interest.
• Mortgage novation regarding the purchase or sale of a property.

It is worth clarifying that in banking and legal language, there are two main types of subrogation:

• Debtor subrogation: changes the person who pays the mortgage (change of holder).
• Creditor subrogation: changes the bank that finances the mortgage (transfer to another entity).

In both cases, the objective is usually the same: to improve conditions or adapt the mortgage loan to a new personal or economic reality.

Next, we will analyze the two most common reasons for requesting mortgage subrogation.

Separation and the need for a change of debtor

One of the situations that tends to repeat itself is, unfortunately, that caused by a situation in which there is a separation of the owners of a property in co-ownership. This separation can lead to many modifications regarding housing matters and its disposition, but the usual key point is to find out who should pay the mortgage in the event of divorce. What we need to do in this first step is an evaluation of the property and decide if either of the two owners wishes to take ownership of the property. To do this, the new owner must acquire not only the rights of use and enjoyment but also the obligations of amortizing the pending mortgage payments.Once it has been established which of the spouses wishes to acquire the property, the change of ownership of the mortgage loan must be carried out, so it will be necessary to go to the bank to formalize the procedure. It is important to keep in mind that we are dealing with a new loan, which, although it will take the property, its appraisal, and the capital amortized so far as a reference, will not do so with the situation of the new owner, who must justify to the bank their ability to meet the mortgage payments.

This point is key: even though the house is the same, the bank conducts a new risk analysis. Therefore, if a single person assumes the mortgage, they must meet criteria similar to those of a new mortgage: sufficient income, stable contract, reasonable debt-to-income ratio, and, in some cases, the provision of a guarantor.

In many transactions, the entity may also require a new appraisal to verify the updated value of the property and ensure that the loan remains properly secured.

It will be the responsibility of the bank to accept the new mortgage holder. Therefore, a particularly complex legal situation may arise for users, since one of the owners will have ceased to be one, but if the bank considers them incapable of meeting the mortgage payments, it may refuse the mortgage subrogation and maintain the ownership and responsibility of the mortgage as is. This would mean that one of the members of the couple, the one who has renounced their property, does not have, in effect, ownership rights over the house and must instead respond jointly with the payment of the mortgage.

When this happens, the situation becomes complicated because, even if there is a private agreement between the parties, the mortgage responsibility remains joint towards the bank. That is to say, if the person who stays with the house stops paying, the entity can claim the debt from both original holders.

Therefore, before signing a property allocation in divorce or separation, it is most advisable to ensure that the subrogation will be viable or to explore alternatives such as the sale of the property, early cancellation, or renegotiation through mortgage novation.

For more information, you can consult your bank or us about your specific situation regarding the measures referred to as mortgage novation.

Modification of the mortgage for financial interest

Many people may have in their minds that once they commit to a bank to establish a mortgage, they must remain in it until the debt is settled. However, they should know that there is the possibility of transferring the mortgage to another financial institution that provides us with some advantages. But Is it profitable to change the bank with which I have contracted the mortgage? Without a doubt, it may happen that our financial situation improves by transferring the mortgage from one bank to another.We can find a very interesting banking offer for this type of transaction; we must keep in mind that the banking market is constantly changing, and it is worthwhile to keep track to access more advantageous conditions in mortgage loans. The variation between the banking conditions of one entity or another can vary considerably and can save us, according to the latest 2019 study published by the newspaper Expansión, up to €19,000 in our mortgage amortization. Can the bank oppose us making a mortgage change? According to current legislation, our financial institution cannot oppose us making a modification to our mortgage, resulting in the transfer to another banking entity. However, it is common to find counteroffer proposals for the client to keep the mortgage at the bank. We must remember that the banking income from a mortgage comes from the collection of monthly interest on the price of money, and this is why customer loyalty is a crucial factor, which they will profit from during the duration of the mortgage loan contract. Does changing the bank mortgage have any cost?

Yes, and it is important to know them clearly. In a subrogation or mortgage change, costs such as the following may arise:

• Subrogation fee (if the contract includes it).
• Notary and registration fees.
• Property appraisal (in most transactions).
• Management fees, if imposed by the bank.

The key is to compare these costs with the actual savings in interest, differential, or fixed rate. If the medium and long-term savings are higher, the operation is usually profitable.

Indeed, since it is a banking operation in which the conditions of a loan are modified, this will generate a certain series of expenses. It would start with the termination of the contract with the current entity and the creation of a new one with the new entity. This new contract must be notarized, and at the time of its execution, it will have financial burdens that we must satisfy. In a practical exercise by the Barcelona Bar Association, we can estimate that a new mortgage constitution can entail around €1,500 in formalization costs for a remaining mortgage of €150,000. Since these usually range between 0.5% and 1% depending on the entity. Although this may seem like a high amount, if the conditions regarding amortization and interest charges are adequate, we can end up saving a significant amount of money, so it should not be an impediment to consult the possibility of improving the conditions of our mortgage. Mortgage novation on the purchase or sale of a property. When we are in a process of real estate purchase-sale, we can reach points in the negotiation where the new buyer of the property wants to make part of the payment using the existing mortgage.This situation commonly occurs in properties that have a mortgage with several years remaining and are for sale. The new owner can reach an agreement to acquire the property with the existing mortgage, and for this, a mortgage novation must be established, which, as we have explained, is the change of ownership of an already granted mortgage loan. The advantages of this form of purchase include, among others, not depending on a prior mortgage approval and being able to acquire an existing one, saving other types of costs. However, we remind you that whenever we try to modify one or all of the owners of a mortgage loan, it must be this banking entity that provides the validation of the new owner. Another case we commonly find is that of the developer who has financed the construction and, at the time of selling the property, proposes the subrogation of the mortgage on the sold part. It is worth noting that if the buyer does not accept the subrogation of the mortgage, the developer will incur the cancellation costs of it. As we can see, in the subrogation of the mortgage, different scenarios intervene depending on the origin that promotes it. Our recommendation is to always consult with a specialist, as a decision in this area that has not been correctly evaluated can end up generating expenses in interest or costs of banking modifications that we could otherwise save.