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Remortgaging and refinancing in Spain

After putting up for years with a bad mortgage deal I have finally researched the market and made the move. I've waved goodbye to one spanish bank and went to a better one. I'll be blogging my 2p worth of knowledge I got from the experience.

To subrogar or to cancelar? That's the many thousand euro question!
Thursday, February 17, 2011 @ 11:37 PM

This is probably one of the biggest dilemmas when shopping around for a mortgage to refinance your existing one. You have 2 basic choices:

- cancel your old mortgage, pay any early cancelation penalties if applicable (law says max 0.5% of outstanding amount), and contract new mortgage as you would normally.

- subrogate your mortgage via another bank. Forgive me for not knowing the correct term in english but in any case, in Spain you would need to know "subrogacion" to ask for it. This means you are changing lender but keeping the same mortgage (you cannot increase the amount), and this is a tax free transaction.

The laws in Spain have finally come out of their prehistoric conditions and now allow reasonable re-financing terms for subrogaciones. At first glance it seems the obvious and cheaper choice. However, there is one element that I personally was not aware of, and I present it in this post in case it benefits someone else. Excuse the laymans language, it's because I am one!

Assume you chose a new mortgage with a new bank. The conditions are better and you have made your calculations and you are happy. The new bank will make a "oferta vinculada", which is an offer to you linked to your existing mortgage. Your existing bank now has an opportunity to answer with their own offer. Now here comes the catch: if the "old" bank offers you a lower interest rate you *have* to take their offer. I cannot stress this enough: if your existing bank offers you a lower interest rate than your new bank does, you are obliged to accept the offer with the lowest interest rate. Regardless of what the overall benefits are. On top of it, the counter-offer need only be valid for one year, so not only the old bank stops your new deal from going through but they might punish you next year with their usual higher rate, or worse. I have had this repeatedly confirmed by various sources but if you know differently please let me (and all readers) know by leaving a message below.

What would I do in this case? I would say take the risk anyway, go for subrogacion, try to get a deal that does not have a high initial rate even if it means that overall you save money, and see if the old bank can come up with something anyway. In the meantime, agree with your new bank that your Plan B is that if it came to it, you would cancel your old mortgage and not go the subrogacion route. Yes, I know, not a very tidy way of doing business. But then you knew that about the world of banking the moment you walked into one as a kid! 

So to summarise, I personally would not cancel my mortgage outright, try subrogacion first, bearing in mind the unreasonableness of the existing law, and then judge accordingly depending on what the existing bank counter-offers. Good luck! I mean it.

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