Under normal circumstances, when we decide to take out a mortgage to finance the purchase of a home, we do so with the intention of paying it off someday, within a few decades. However, for one reason or another, this isn’t always possible, so someone else may have to take on this debt to pay it off. This is known as mortgage subrogation.

In this case, the change in conditions occurs on the part of the borrower, although there may also be changes on the part of the lender, such that another bank takes over the management of the entire process. That’s why, in today’s article, we’re going to provide you with all the details about mortgage subrogation, so you’ll have a clear understanding of how it works and know how to go about it if you need to exercise this right.

What is mortgage subrogation?

Let’s start at the beginning: according to the RAE, “subrogate” means“to replace or substitute someone or something for another person or thing.” So, in the context of a mortgage, it basically means replacing some of the terms of the mortgage with others.

This leads us to distinguish two different types of mortgage subrogation:

– Mortgage subrogation by a creditor: This occurs when a person with an existing mortgage decides to transfer it to another bank because doing so will allow them to obtain better terms than those they initially agreed to.

– Mortgage subrogation: This change affects the person or persons who originally took out the mortgage, transferring responsibility for it to a third party. This is what happens when, upon buying a home, we choose to assume the mortgage that the previous owner had taken out, as this allows us to save on initial costs.

Let’s take a closer look at the features of these two types of mortgage subrogation.

Why switch mortgage lenders?

When signing our mortgage, it’s important to keep in mind that this contract doesn’t necessarily “tie” us to the bank that provides it. Throughout the term of the mortgage, we can monitor the mortgage market to see what offers other lenders are making and whether they’re better than what we currently have, because we’ll always have the right to switch our mortgage to wherever we’re offered the best terms.

In other words, if at any time we wish to change the mortgage interest rate, modify the reference index to which it is linked, replace or remove certain clauses, alter the repayment terms, or reduce the associated fees, etc., we may consider initiating the mortgage subrogation process with a change of creditor.

In fact, this is quite common these days due to the current and evident increase in variable-rate mortgage payments as a result of the crisis. To give just one example, it is estimated that following the European Central Bank’s decision to raise interest rates by 50 basis points, there will soon be an increase in variable-rate mortgage payments of between 1,900 and 4,700 euros per year. In other words, this represents an increase of between 160 and 390 euros per month (32% of the monthly payments) in the cost of these loans.

How do I apply for a mortgage subrogation from a creditor?

If we believe that another bank can offer us better terms than our current bank, we can easily begin the process. All we need to do is submit an application to the bank we think can improve our mortgage so that it can review it and determine whether it’s in its best interest to make us an offer with its own financial terms to take over the loan.

If so, this entity will request from the bank that holds our mortgage the documentation regarding the amount we have already paid and the amount we still owe. The bank will have 7 days to respond; it will then have another 15 days to prepare a counteroffer and present it to us so that we can consider it and keep our mortgage with them.

Ultimately, it will be up to us to weigh the proposals from both parties and make a final decision within the aforementioned 15-day period. If we are satisfied with the new terms offered by our current bank, we can renew the mortgage under the new terms; if not, we have the right to subrogate the mortgage and transfer it to the lender that initially made the offer that appealed to us.

Why change the name on the mortgage?

As we’ve already mentioned, there are times when the home we’ve decided to buy isn’t meant to be our forever home. So we may choose to sell it even if we haven’t yet paid off the entire mortgage. To do this, we can arrange a mortgage subrogation so that the new buyer assumes responsibility for the mortgage.

The regulations governing this process are based on the Civil Code and the Mortgage Law. These stipulate that the creditor (the bank) must approve the transaction; therefore, it has the right to assess the buyer’s financial situation to verify their creditworthiness and the viability of the mortgage. And if the bank gives the green light, it will, of course, also be necessary for both the seller (the original borrower) and the buyer (the new borrower) to agree and set forth the mortgage subrogation in a contract.

What do we need to transfer a mortgage?

These are the requirements you must meet if you’re considering a mortgage subrogation:

• Demonstrate that you have a stable financial and employment situation: have a job (preferably with a permanent contract), have no outstanding debts, and not currently have any other loans that could compromise your financial situation.
• To have made all payments on the previous mortgage for a certain period of time, which is usually two years.
• The outstanding principal must not exceed 80% of the total value of the home. And, if we request a further extension of the repayment term, this extension must not exceed 30 years.

You’ll also need to provide a number of documents:

• Personal and financial information: your DNI or NIE, a copy of your contract and your most recent pay stubs, your most recent income tax return… Anything that legally verifies your information and your current employment and financial status.
• Financial information: the deed for your current mortgage, statements for other loans (if you have any), etc. Keep in mind that the new financial institution may ask you to authorize a credit check through CIRBE to review your history of loans, credit, guarantees, and risks.
• Property information: the deed, property abstract, or appraisal report.

What are the costs involved in assuming a mortgage?

Don’t forget that we’re dealing with a process that involves a number of expenses. Specifically, these can be broken down into:

• Processing fees: It is recommended that you leave the process in the hands of an administrative agency, which will handle all the paperwork. This will involve a number of expenses, including the required appraisal of the property, the notary’s fees for formalizing the new contracts, and the Land Registry’s fees for recording and maintaining them.
• Subrogation fees: These will vary depending on the type of mortgage in question. For example, a fixed-rate mortgage typically has a fee of 0.50% for the first 5 years and 0.25% thereafter, while a variable-rate mortgage has a maximum fee of 0.25% for the first three years and 0.15% for the fourth and fifth years; after which there are no further fees.

There are situations where subrogating a mortgage will not incur any costs, either because the mortgage was not subject to fees or because, for example, the bank has chosen not to charge them in the case of a renewal. But in all other cases, you’ll need to evaluate all the costs associated with the new contract you want to sign to decide whether you’ll actually come out ahead with the switch.

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