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Financial Dictionary - Mortgage extension
Mortgage extension
A mortgage extension is the process of changing the terms of the mortgage loan we have arranged with our bank. It allows us to reduce the amount of the instalments, ask for slightly more money, or both. This procedure is also known as novation (novación), and it is usually cheaper than remortgaging or signing a new loan.
Calculate the instalments for your variable-rate mortgage
Applying for a mortgage extension can be useful if, for example, we are planning to carry out a home renovation, if something unexpected comes up, or if we would feel more comfortable repaying our mortgage in smaller instalments. Remember that this novation will be subject to the bank's criteria, and that the bank will invariably look at our solvency and ability to assume more onerous obligations.
As we mentioned previously, a mortgage extension involves modifying certain terms of our loan in one of three ways:
- Increasing the principal we borrow. This option is highly recommended if we need to raise more money. However, it is important to remember that this extension will push up our monthly instalments, because we effectively owe more to the bank.
- Increasing the principal we borrow. This option is highly recommended if we need to raise more money. However, it is important to remember that this extension will push up our monthly instalments, because we effectively owe more to the bank.
- Extending the repayment period (i.e. increasing the number of monthly payments). This option is only advisable in certain specific cases (perhaps if we are experiencing financial difficulties, or if our income has been drastically reduced and we are unable to honour our repayments), as our bank will insist on higher interest rates in return.
- Extending both: amount and term. This can be a good way of raising extra money without affecting our monthly repayments. However, we will be paying more interest, just as if we were to increase the number of instalments.
Who can request this extension, and what requirements must be met?
In principle, anyone who has arranged a mortgage loan with their bank. Once the application has been made, the bank will analyse our solvency, taking into account our age (the mortgage must be fully repaid before we turn 70), or the amount that we still have to pay back (for example, if we have more than twenty years to go, it is unlikely the bank will agree to an extension). The bank will ask us for some documents to analyse, including our income and expenses; whether we are current with our payments and whether we have an acceptable level of indebtedness; whether we have job stability; or whether we can furnish a guarantee in the event of default.
In addition, if we choose to increase the amount, the bank may ask us why exactly we need the money. and if we choose to increase the number of instalments, the bank will not allow us to continue paying beyond forty years and may also insist that we have no other long-term debts.
A mortgage extension entails new terms and conditions and comes with certain costs. To begin with, we will have to pay the notary, the registry and stamp duty (known as IAJD), although we can avoid this cost if we choose to increase the instalments. Mortgage novation fees vary by bank, although it must not exceed 0.1% of the outstanding debt.