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Subrogation and Novation - What are they?
By Iurus Tantum Consulting Group - Apr 2, 2007 - 6:48 PM
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While being practically unheard of in the UK as far as Mortgages are concerned, these processes are common in Spain
Last month this column looked at some of the differences between Spanish mortgages and those offered by banks and Building societies in the UK. This month we stay with mortgages and take a look at the processes known as Subrogation and Novation which, while being practically unheard of in the UK as far as Mortgages are concerned, are common practices in Spain.

First, a word of warning; although the terms Subrogation and Novation exist in English, they have opposite meanings in Spain, which leaves room for confusion. Strictly speaking, under English law, a subrogation is where your rights are transferred to another party under a contract, but the actual contract remains with you (for example, if you claim under a contract of insurance when your car is stolen, your rights to that car are then “subrogated” to the insurance company should it later be recovered). A novation under English law occurs when there is a complete substitution of one party in a contract for another without creating a new contract. For example, halfway through the agreed term you transfer your mobile phone contract to another person and the original terms and conditions continue to apply while the new party assumes your obligations for the remainder of the term the contract is then said to have been “Novated”.

In Spain it is the opposite and a subrogation occurs when one party takes over a contract of another, what we would call a novation under English law. You are most likely to come across subrogation when purchasing a property on which you require a mortgage, as you would literally take on the responsibility of repaying any existing mortgage the current owners have for the remainder of the term together with all the terms and conditions they originally agreed to. The mortgage is simply transferred completely into your name.

While this may seem a peculiar practice if you are used to the UK market where you would simply take out a new mortgage in your own name, there is a good reason for it in Spain; to lesson the tax burden. Spanish tax can amount to as much as 3,600€ on a mortgage of 200,000€, even before administration expenses are added. However, if you are simply taking over responsibility for the repayment of an existing mortgage (subrogation) and not creating a new one, then this tax has already been paid which in turn may mean substantial tax savings for you.

Developers will commonly finance their project with a mortgage and are often able to negotiate very reasonable terms with their lender. When you purchase a new property you may be offered the opportunity to have a proportion of the developer’s mortgage that is directly attributable to the property you purchase passed to you under a borrower’s subrogation. You would then be responsible for repaying it under the original repayment schedule and the terms agreed between the developer and their lender.

Often, this will prove an attractive proposition due to the rates and conditions the developer has been able to negotiate, but not always and you should remember that there is no obligation to accept the developers mortgage if you have found better terms with another lender or prefer to deal with a UK financial institution.
Should you wish to change your mortgage provider during the term of the mortgage you would arrange a “lenders subrogation” where the lender is substituted for another. However, while the law limits the amount of commission (a type of redemption penalty) the original bank can charge to 0.5% of the loan and there is no tax to pay (as again, you are simply transferring an existing mortgage), the arrangement fees and administration costs may mitigate any benefit of lower interest rates or better terms and so careful calculations are needed before switching lenders.

The alternative to changing lenders completely is a novation. This occurs where you simply renegotiate the terms of your existing mortgage with your existing lender and again, this will not attract any tax as a new mortgage has not been created. However, if the new terms are substantially different from the original you may wish to have them registered at the Land Registry which will of course require a notary and registration fees.

Finally, if you are taking over an existing mortgage you may well want to renegotiate the terms at the same time and so a “Subrogation with Novation” would apply. To all intents and purposes this would be the same as taking out a new mortgage on the property as both the borrower and the terms will be so different to the original mortgage as to make it almost unrecognisable. However, by the use of subrogation and novation the authorities deem the original mortgage to continue and no tax will be payable on it when it is transferred to you.

As with so many areas of Spanish life, there seems to be no end to the methods of minimising your tax liability, but it is essential to take professional advice to ensure you don’t overstep the mark and into tax evasion!

© 2007
Iuris Tantum Consulting Group
3 Princes Street
Mayfair, London
W1B 2LD
Tel: (44) 02074082021

Email: webenquiry110@itantumgroup.co.uk

www.itantumgroup.co.uk


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