If your current mortgage has worse terms than what's available on the market, or if you're buying a home that already carries an existing mortgage, you've probably come across the term "subrogation." It's a concept often confused with other mortgage transactions, so it's worth clarifying exactly what it involves.
Creditor subrogation: switching banks without cancelling the mortgage
This is the best-known type of subrogation. It involves transferring your current mortgage to another bank that offers better terms (a lower interest rate, a better spread), without needing to cancel the original mortgage and set up a new one from scratch. The new bank pays off the outstanding debt to the original bank and becomes your new creditor.
The advantage over cancelling and taking out a brand-new mortgage is that the paperwork and costs are usually lower, since the same loan is kept (with renegotiated terms) rather than a completely new one being set up.
Debtor subrogation: when you buy a home that already has a mortgage
This second type happens when you buy a home that already has an outstanding mortgage, and instead of the seller cancelling that mortgage before the sale, you (the buyer) step into their position, taking on the outstanding debt under the terms already agreed by the seller. This is common when buying new-build homes, where the developer already has a mortgage on the building.
The right to improve the offer: the original bank's counteroffer
When you start a creditor subrogation, your original bank has the right to present a counteroffer to match or beat the new bank's terms and keep you as a customer, before the subrogation is finalized. This effectively turns subrogation into a useful negotiating tool, even if you ultimately decide to stay with your current bank.
Costs associated with subrogation
The Real Estate Credit Contracts Law lowered the fees the original bank can charge for subrogation, capping them in a way similar to early repayment fees. Even so, other costs may apply (notary, registry) depending on the specific case, though these are generally lower than those of taking out a completely new mortgage.
When subrogating your mortgage pays off
Subrogation is worthwhile mainly when there's a significant difference between your current mortgage's interest rate and the terms available on the market, enough to offset the costs of switching. The more capital you still owe and the more years left on your mortgage, the greater the potential accumulated savings from an improvement, even one of just a few tenths of a percentage point.
Compare your current mortgage against an alternative
Our mortgage calculator lets you simulate the monthly payment and total cost under different interest rates, so you can compare your current situation against the offer you're considering before starting a subrogation.