The new Mortgage Law offers consumers facilities to obtain a mortgage novation or subrogation, two actions that allow to increase the repayment term, extend the loan amount or change the interest rate.
But when making this last change -which can be very beneficial for our pocket-, some doubts usually arise. Do I have to meet any requirements? What conditions do I have to negotiate with the bank? Do I have to pay any expenses when changing the mortgage from variable to fixed rate? Is it a profitable decision in the long term with Sky Marketing?
Interest, a fundamental aspect when contracting a mortgage
Before contracting a mortgage, we must assess many issues, including the offers and conditions that each bank offers us, if we will have to hire a product to obtain the best conditions for a loan or what will be the interest rate that we will pay.
Possibly the most important of these is precisely interest. That is, the additional money that we must return to the bank for the capital it has lent us. When choosing the interest rate for our mortgage, we should not only assess the monthly payment, but also the total interest that we will pay at the end of it.
Depending on the interest rate, banks offer three types of mortgages: variable, fixed or mixed.
- In variable mortgages the interest changes throughout the mortgage.
- In fixed mortgages we pay the same interest throughout the loan.
- In the mixed ones we pay a fixed interest at the beginning (3 or 5 years) and then a variable one.
What interest benefits us the most?
We must make it clear that there is no better financing model than another, but that when deciding whether to mortgage a fixed or variable rate, it depends on our savings, our income and the risk that we can and are willing to assume in the event of a rise of the monthly installments.
For example, in variable rate mortgages, the initial installments are lower. This is because, out of the box, the interest in them is lower, so they are cheaper. In addition, variable mortgages have a longer repayment term, so you can extend your payment for more years. Finally, variable mortgages do not have many commissions. These three aspects make, a priori, these mortgages more accessible.
In contrast, the installments of variable mortgages are unstable. Think that with these loans the interests are reviewed annually or semi-annually, so that in a year or in a few months we can go from paying very low monthly installments to other high ones. In addition, since the repayment term is longer, with variable mortgages we pay more interest throughout the loan.
Is it time to change my mortgage from variable to fixed rate?
Changing a mortgage from a variable to a fixed rate is relatively simple and does not require great efforts or procedures. In any case, if you are considering changing the interest on your mortgage, you can take these aspects into account:
- Fixed mortgages are always safer. You will know what you will pay each month, from the beginning to the end of your mortgage, so it will be easier to control your finances.
- You can make the change from a fixed to variable rate mortgage at any time, as long as you negotiate it with the bank. Entry into force is immediate after signature.
- Before making the decision, study how much time you have left to finish paying your mortgage: if the pending repayment term is less than five years, it is possible that the expenses of changing the variable mortgage to a fixed one will exceed the interest.
- If you have taken out a variable mortgage in the last three years, with high initial installments, it is possible that the increase in interest expected for the next few years will negatively affect you. These mortgages are considered suitable for interest rate changes.
What options do I have and what steps should I take?
If you are determined to change a mortgage from a variable to a fixed rate, check with your bank about the options you have, as you will have to negotiate directly with them.
In principle, you have three possibilities:
- Cancel your loan and take out a new mortgage with the money pending payment.
- Bet on a novation (that is, change the current ones of your mortgage).
- Choose a subrogation (that is, take your mortgage to another entity and negotiate with them).
Either of the last two options is better than canceling the mortgage loan and opening a new one, because the expense in the latter case is higher: you will have to assume the cancellation costs (between 0.25% or 0.5% of the total loan), and the costs of setting up a new mortgage.
Change mortgage from fixed to variable rate with a novation
The easiest option to change the interest on your mortgage is to request a novation with your own bank, or what is the same, negotiate changes in the current contract to change the interest rate. With a novation you can also extend the loan amount or the repayment period.
The novation implies a series of administrative expenses, since it is necessary to make a new public deed of the mortgage contract. These expenses are those associated with the notary’s office (between 0.2 and 0.5% of the capital pending amortization), the property registry and the agency. On the other hand, the bank can charge you a maximum commission of 0.15% of the money pending payment and that must be amortized over the following three years.
Change mortgage from fixed to variable rate with a subrogation
If our bank does not provide us with a novation, the other option is to transfer our mortgage to another bank that offers us more beneficial conditions, including the change from variable to fixed interest.
In this case, a commission similar to that of the novation must be paid (0.15% of the amount to be paid, amortizable in the first three years), in addition to the notary and registration expenses. To these costs we will have to add one more, the appraisal , since this procedure is mandatory for the new bank to grant us the mortgage.
What interests me the most? What does the new mortgage law say about it?
The novation is the easiest option to change the interest on your mortgage from variable to fixed, since you will not have to go to another bank, you will have fixed fees and you will pay less total interest. In subrogation, the supply and demand in the mortgage market can play in your favor.
In any case, the conditions of the new Mortgage Law favor both subrogation and novation. However, it all depends on the consumer, who must assess whether he will amortize the interest change and how it will affect his economy.
As a general rule, if you are in the first half of the life of your loan, with many years ahead, the change from variable to fixed interest can protect you for the future. If you still have at least 10 years left, surrogacy may be the most interesting option.
Are you thinking of taking out a mortgage? Not sure if you are more interested in a fixed rate or a variable one? Do you want to request a novation or subrogation to improve the conditions of your mortgage?
At Tajarat properties we are experts in the real estate sector. Contact us and we will advise you on your mortgage.