Have you ever heard of mortgage subrogation?.This term may sound complex, but it's actually easier to understand than it seems.
Subrogation is a key concept in the financial sector, especially in real estate. That's why we're offering a clear explanation to help you understand everything you need to know.
What is mortgage subrogation?
Mortgage subrogation involves switching lenders in order to obtain better loan conditions, most often a more advantageous interest rate.
For various reasons, a borrower may decide to change lenders through mortgage subrogation or refinancing. This is an attractive option that allows them to transfer their mortgage without having to take out a brand-new one.
In practice, during a subrogation, a new lender agrees to take over the borrower’s existing mortgage. The new lender replaces the old one in the mortgage deed, without changing the loan amount or the amortization period.
How does the transfer of a mortgage by subrogation work?
The process begins with finding a new bank or financial institution willing to take over the existing loan. Working with a mortgage broker can make this step easier.
The new lender will review the borrower’s financial situation to determine if the subrogation is beneficial to both parties. If approved, a formal request is submitted, including details such as the remaining mortgage balance, interest rate, amortization period, and contract terms.
Because the agreement is usually finalized by a notary, there may be legal fees involved. However, some lenders offer to cover these professional costs.
Once the subrogation is approved, the new lender assumes responsibility for the mortgage and repays the outstanding balance to the original lender. The borrower then begins making payments to the new lender under the agreed terms.
Can a mortgage be transferred at any time?
In some cases, the mortgage deed may prevent or complicate the transfer to another lender. This is especially true for collateral or umbrella mortgages.
When subrogation isn’t an option, refinancing may still be possible. Some lenders may agree to cover notarial fees for the transfer, while others may impose additional charges, such as penalties from the original lender.
A lender may also refuse the transfer altogether. In that case, switching lenders would require creating a brand-new mortgage, which may include fees like penalties for discharging the existing one.
What are the advantages of mortgage subrogation?
Subrogation offers several benefits for homeowners with an active mortgage. Here are some of the main ones:
1. Cost savings
Subrogation helps avoid or reduce certain costs associated with changing lenders. Closing and administrative fees are often lower, and the new lender might cover notary costs. This can make subrogation a more affordable option compared to full refinancing.
2. Preserving existing terms
By transferring your mortgage to a new bank, you may retain certain terms of your original loan, such as the amortization period, mortgage amount, or monthly payments. You may also negotiate improved conditions with your new lender.
3. Faster process
Subrogation is usually quicker than refinancing or creating a new mortgage. This allows you to quickly benefit from a lower interest rate or more favourable terms.
What are the disadvantages?
Despite its benefits, mortgage subrogation comes with some drawbacks to consider before moving forward.
1. Potential fees
Even though the costs are generally lower, it’s essential to review them carefully. For example, you could face early repayment penalties if you break your contract before its term ends. These penalties can be significant, so make sure you’re fully informed.
How to avoid mortgage penalties?
In some cases, you might reduce or avoid penalties, for instance, if you have an open mortgage or if your contract allows extra payments without penalty. Be sure to check your agreement with your current bank before proceeding.
2. Comparison is key
Loan conditions vary from one institution to another, so don’t settle for the first offer you receive. This also applies to subrogation. Comparing offers thoroughly is crucial to finding the one that best suits your needs. Although the comparison process can be long and complex, a mortgage broker can help simplify it.
3. Eligibility not guaranteed
Mortgage subrogation isn’t available to everyone. Depending on the current terms of your mortgage, your financial situation, and the eligibility criteria of each lender, your request may be declined. Be sure to gather all necessary information and meet all conditions before initiating the process.
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