Mortgage loan novation

The novation or modification of the mortgage loan can affect, in essence, any part or covenant of the original contract, however, the most common modifications that we can find in reality are the following:

• Modification of the interest rate: The percentage of the loaned capital that the debtor pays to the creditor as remuneration for lending him the money is modified.
• Modification of the repayment term: The parties agree to extend the loan repayment term, so that if, for example, the principal loaned was initially to be repaid within 30 years, after this modification, the debt will be repaid in installments over a period of 35 years. Logically, extending the life of the loan will result in a reduction of the monthly payment.
• Increase of the borrowed capital: Faced with new financing needs, creditor and debtor agree to increase the amount of the loan , so that if, for example, the bank initially lent us 150,000 euros, it now lends us an additional 50,000 euros, so that the total debt is fixed at 200,000 euros.
• Change of loan holders, so that the debtor's position, previously held by several persons, is now held by only one.

Beyond these most common modifications, as indicated above, novation can affect any other clause or agreement in the contract, such as:

• The modification of the amortization system, that is to say, of the mathematical-financial formula that determines the monthly amount of the installment to be returned to our creditor financial institution.
• Introduction of a grace period, i.e. a period in which no principal will be returned to the Bank or Savings Bank, but only the interest accrued.
• The modification of the guarantees of the operation, so that if the loan now presents more risks, new assets can be encumbered with new mortgages or, on the contrary, if the debtor experiences an increase in its economic capacity or patrimony, a reduction of the same.
  

The novation or modification of the mortgage loan, as has been indicated, implies a modification of some essential aspect of the contract. Thus, on this basis, depending on the specific aspect or aspects that are modified, the operation may contribute to satisfy different needs, among which the following stand out:

• If the interest rate is modified, as a general rule, it will mean a reduction in the interest rate, since logically, the debtor will rarely accept a modification of his loan that involves applying a higher interest rate. Thus, if there has been a generalized and structural drop in interest rates in the real estate market, which is expected in the long term, so that the interest rate we are currently paying is much higher than that which corresponds to the new operations that are formalized, it is reasonable to think that the debtor, with the capacity to negotiate given the above circumstances, may agree with his Bank or Savings Bank a modification, downwards, of the interest rate applicable to his loan, which will essentially mean a reduction in the monthly payment he pays back to the entity.
  
  Likewise, if applicable, the modification of the applicable interest rate may involve a change from a variable to a fixed interest rate or, conversely, from a fixed to a variable interest rate.
  
  a) On this matter, the reader should bear in mind that, at present, given the circumstances of the mortgage market, opting for a fixed interest rate will mean paying a higher installment, but with the positive aspect that this will not change throughout the life of the loan.
  
  b) On the contrary, if we opt for a variable interest rate, at present, the installment to be paid will be lower, but with the uncertainty as to what will happen in the future, since if the interest rates rise, our installment will also be increased notably.
  
  In short, and for all the above, a modification of the interest rate of our loan can allow us to reduce the monthly payment (in case the circumstances of the market are more favorable) or, in its case, to modify the applicable interest rate for another different modality, which for example, in case of opting for a fixed interest rate, will allow us to make sure that during the whole life of the loan we will pay the same payment, which without a doubt contributes certainty and tranquility to our family economy.

• If the repayment term is modified, this can be a way of obtaining a "cushion" in the face of a complex economic situation, because if the loan repayment term is extended, the monthly payments to be made will be lower, which can help a family to cope with a specific difficult financial situation, such as the unemployment of one of its members or an unforeseen increase in monthly expenses.
• In case of opting for an increase of the loaned capital, its usefulness is evident, since the financial entity will lend us more money, with which we will be able to face that expense or investment whose necessity has appeared a posteriori, as for example it can be a few works of reform, the purchase of another real estate, the payment of the studies of a son, etc.
• In the case of the modification of the debtors, it can serve to clarify the patrimonial situation after a separation or divorce, so that the spouse who is awarded the property of the habitual residence, now assumes exclusive ownership of the mortgage loan.
• If we opt for the modification of the amortization system, this will have an impact on the monthly payment to be returned to the Bank, since depending on the new system chosen, this will imply a variation, both present and future, of the amount of the monthly payment that we pay to our entity. Thus, if we want to pay less money each month now, we can opt for an increasing installment system, while if on the other hand we want to pay more money in the present and less in the future, we can opt for a decreasing installment system.
• If our mortgage loan is modified to introduce a grace period, this can help us to cope with a difficult economic situation, since during the grace period (for example 6 months or 1 year), we will only pay back to the Bank or Savings Bank interest and not capital, which will greatly reduce the amount to be paid each month, thus contributing to alleviate the financial stress that our personal finances may experience.
• In the event of opting for a modification of the guarantees of the operation, this may imply:
• ~Or a reduction thereof, so that, for example, if the debtor has experienced a significant increase in its assets or its economic capacity, the financial institution no longer considers it necessary to encumber the acquired property with a real right of mortgage, since it understands that the personal guarantee is sufficient. In such a case, by releasing the property from the encumbrance of the mortgage, if applicable, this may allow the owner to apply for another loan, now providing the released property as collateral.
• ~On the other hand, if, for example, more money has been requested from the bank, it is possible that the bank will demand an increase in the guarantees, which may result in the need to mortgage another home, such as a second home owned by the debtor.

If I wish to modify or novate my mortgage loan, altering any of the conditions or aspects of the contract that have been explained, to achieve any of the purposes that have also been detailed, undoubtedly, the first and essential step will be to go to my Bank or Savings Bank to negotiate this modification, since like any contract, the loan that binds me to my financial institution can only be modified if both contracting parties reach an agreement in this sense.

Therefore, we will have to go to our manager at our Bank or Savings Bank, present the need that has arisen and negotiate accordingly the modification or modifications that we consider convenient, reaching an agreement between the parties if possible.

Once the modification to be made has been agreed, the next step will be to go to a Notary's office to formalize the novation of the mortgage loan, through the execution of the corresponding public deed, which, subsequently, must be registered in the corresponding Property Registry.

The novation or modification fee is the fee that a financial institution may charge if it agrees with its debtor client to modify the terms of the loan.