How to Refinance Your Mortgage in Spain to Save Money

22 November, 2023 | M Aparicio

Normally, a mortgage represents a long-term relationship with the bank, and over such a period, we will likely go through various circumstances and economic situations in which we may need to consider refinancing our mortgage.

The most important thing is that the mortgage refinancing is done well so that it is as beneficial as possible for you. To assist you in this task, we have prepared this article from Hipotecas Plus, with all the information and experience we have.

When we sign a mortgage, we may feel that we are entering into an immutable commitment, but this is not the case. The reality is that the conditions of your mortgage loan can be shaped to adapt to your changing financial needs.

What Does Mortgage Refinancing Entail?

Refinancing a mortgage involves modifying the conditions of your mortgage loan with the aim of improving them or, in some cases, requesting more money. Depending on how you carry out this operation, it is given a different name:

  1. Novation: This process refers to the modification of the conditions of your mortgage without changing financial institutions. Here, you negotiate the new conditions with your current financial institution. However, bear in mind that what you propose and what the entity accepts may not coincide. Changing the interest rate or type of interest (from variable to fixed) might not be straightforward. It’s a negotiation, and it’s better if you have plenty of information and, if possible, get expert help. As you know: the bank always wins, or at least it always tries.
  2. Subrogation: Subrogation involves transferring your mortgage from one financial institution to another to obtain better conditions. This is often more common with older mortgages that were signed when market conditions were less favorable. However, this option has certain limitations, as it only allows you to modify the interest rate, commissions, linkages, and the term of the loan, but does not allow you to request more money.

Let’s explain everything you can change through a subrogation:

Interest Rate: With mortgage subrogation, you can change the interest rate to make your mortgage more affordable. You could also switch from the IRPH index to Euribor, as IRPH tends to have a higher calculation formula than Euribor, and you can also switch from a variable-rate mortgage to a fixed-rate one or vice versa.

Eliminating Harmful or Abusive Clauses: In the years of the economic bubble, many contracts included abusive clauses that you can get rid of with a new contract at a new entity, such as the floor clause, the clause of high penalty interest rates, the rounding up clause, etc.

Linked Products and Commissions: In the contract, you may have established commissions, such as those for early amortization, and you can get rid of them at the new bank, or you might be paying for linked products that were part of a discounted mortgage offer in the past. With subrogation at the new bank, you might be able to free yourself from these linked products and still achieve a better interest rate than you had with the first entity.

The Term: Subrogation can also be a good strategy to reduce or extend the remaining term of the mortgage. If you extend it, you will achieve a more manageable installment; if you reduce the term, your mortgage will end sooner. Be careful with the new conditions you sign and try to achieve the most beneficial situation for yourself. Reducing the installment in exchange for a longer term can relieve financial burdens, but it should not be done at any cost. You may end up slightly reducing your installment in exchange for a significantly longer mortgage duration and much more interest, which will translate into a great benefit for the institution and undoubtedly a disadvantage for you.

3. Obtaining a New Mortgage: This refinancing option is becoming an increasingly popular strategy. Its appeal lies in the fact that, in this case, with the new mortgage, you can discuss everything. This means you can renegotiate all the terms allowed under subrogation, as well as the mortgage capital, which means you could request more money or access the funds you had already amortized in the old mortgage. The choice of method will depend on your objectives when refinancing your mortgage.

What are the Requirements for Refinancing a Mortgage?

The requirements for refinancing a mortgage are essentially the same as those for obtaining a mortgage. The financial institution will analyze your income, job stability, and the property you wish to refinance. They will also assess whether you are up to date on your current mortgage payments, as they want to ensure you are a reliable payer.

Ultimately, institutions seek to lend to clients who are stable and have sufficient income to comfortably manage the new loan. At Hipotecas Plus, we always recommend adopting a savings-oriented lifestyle and trying to minimize any debts outside of your mortgage, such as credit card balances or personal loans.

Banks love savers. They open their doors to such individuals, and as a person with savings, you can not only secure a mortgage but also potentially receive better terms.

Why Consider Refinancing Your Mortgage?

There are various reasons to refinance your mortgage, but the most common one is to improve the terms of the loan and save money over time. Additionally, you can opt to switch from a variable interest rate to a fixed rate, or add additional borrowers to the loan.

You might also be interested in reducing your monthly payments. If this is your case, refinancing the loan to extend the payment term can be a solution. But beware! When we undertake this type of operation, we increase our debt by converting short-term loans into long-term loans, which means we end up paying more in interest.

Another possibility is using refinancing to fund other projects, such as renovating your home or consolidating debts. Although personal loans are available for these purposes, they are generally more expensive than a mortgage. However, in these cases, keep in mind that most entities will allow you to remortgage your property up to a maximum of 80% of its purchase value.

Refinancing your mortgage is a decision that should be taken with care. You know that banks are very skilled and will use their expertise to their advantage. So, don’t act or sign hastily, use as much caution as possible, and you should be the best expert on your personal finances.

Refinancing should always benefit you in terms of savings, and your savings should exceed the costs associated with the operation. Novation, subrogation, and signing a new mortgage all involve costs and fees that you must consider. Below, we explain the potential costs according to the different refinancing modalities.

Costs of Mortgage Refinancing

• Mortgage Novation: You need to review the deed to know the commission for novation. Its price ranges from 0% to 1% on the capital you have left to pay on your mortgage. You will likely also have to pay for the property appraisal if you are looking for a reduction in the interest rate or want to increase the capital with the novation. The cost of appraisal is usually between 250 and 300 euros.

• Mortgage Subrogation: For this, the new bank where you subrogate your mortgage will ask for an appraisal: the cost of appraisal typically varies between 250 to 300 euros. There is also a subrogation commission that you must pay to the old bank (check this in your mortgage deed): its cost ranges from 0 to 2% of the outstanding capital.

• New Mortgage: If you opt for this form of refinancing, it means you will have to carry out the registry cancellation of your old mortgage, which entails an approximate cost of 1000 euros. As you have to pay off your first mortgage early, you will need to account for the early repayment commission, which usually varies between 0% and 2% (check this in your deed). Being a new mortgage, an appraisal will also be needed: between 250 to 300 euros.


Other articles that may interest you.

Article from the Bank of Spain: Mortgage debt restructuring