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Financial Dictionary - Novation

Novation

Novation involves changing or terminating one of the parts of an agreement through a new agreement between the parties. Novation is a term widely used in the finance world and it most commonly involves changing the terms and conditions of mortgage loans.

In the field of mortgages, we talk about mortgage novation to refer to any changes made to a mortgage agreement after it has been signed. Since the agreement is already in force, these types of changes require a new agreement between the parties to re-negotiate the agreement.

What type of changes are involved in a mortgage novation?

Some of the most common changes in a mortgage novation are:

  • The interest rate initially agreed can be changed from a fixed rate to a variable one or vice versa, or the spread can be re-negotiated.
  • The loan holder can be changed
  • The term can be increased and the monthly payment reduced, or the term be shortened and the monthly payment increased.
  • The amount can be increased, i.e. the mortgage is extended.
  • The guarantees can be changed to remove existing guarantees or add new ones.
  • Changes can be made to the settlement system such as adding a grace period or other related change.

Depending on the changes being made, the mortgage novation process will vary: a new public deed might need to be drawn up, it may need to be registered in the registry, taxes paid, etc.

How much does it cost to change a mortgage?

A mortgage novation involves a new transaction, re-negotiating prices and risks and usually incurs a series of novation fees that the bank charges, including:

  • Mortgage novation fee
  • Notary fees
  • Property registration, if necessary
  • Administration costs

Mortgage novation can bring a number of advantages because it is cheaper than cancelling the mortgage, it saves money and improves the mortgage terms and conditions.