Short answer. As a rule, the mortgage or guaranty is extinguished along with it. Article 1296 provides that once the principal obligation is extinguished by novation, accessory obligations subsist only to the extent they benefit third persons who did not consent to the novation. Otherwise, the security dies with the debt it secured.
What the law says
When the principal obligation is extinguished in consequence of a novation, accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent.
Civil Code, Article 1296 — Effect of Novation on Accessory Obligations. Read the full provision →
The general rule: security follows the debt
A mortgage or guaranty is an accessory obligation, meaning it exists only to secure the principal debt and has no independent life of its own. Article 1296 confirms that logic for novation: once the principal obligation is extinguished as a result of the novation, the accessory obligations tied to it are extinguished too, unless the exception below applies. So if a bank and a borrower agree to replace an old loan with an entirely new one on different terms, the mortgage that secured the old loan does not automatically continue to secure the new one just because the parties are the same.
The narrow exception: protecting third persons
The article carves out one exception: accessory obligations may subsist only insofar as they may benefit third persons who did not give their consent. This protects someone outside the novation, for example a person who benefits from a guaranty or a subsequent lienholder whose rights were built around the original security, from having that benefit erased by an agreement between the debtor and creditor that they never consented to. The accessory obligation survives for that third person's protection even though it would otherwise have died with the extinguished principal debt.
Why lenders re-execute security instead of relying on the old one
Because the general rule extinguishes the security along with the novated debt, a creditor who wants continued protection for a new obligation cannot simply assume the old mortgage or guaranty carries over. This is why loan restructurings and debt consolidations are typically accompanied by fresh security documents, or by an express agreement that the existing mortgage or guaranty will continue to secure the restructured obligation. Relying on silence risks leaving the new obligation unsecured, since Article 1296 does not preserve the accessory obligation for the creditor's own benefit, only for a non-consenting third person's.
What to check before agreeing to a novation
Anyone restructuring a secured debt, whether as debtor, creditor, or guarantor, should look closely at what the new agreement says about existing security. If the parties intend the mortgage or guaranty to continue covering the new obligation, that intention should be stated clearly in the novation itself, because the default rule under Article 1296 works against automatic continuation. A guarantor who signed for the old debt should also confirm whether the new arrangement still binds them, since a novation without their consent can release them from an obligation they never agreed to carry forward.
Cases citing this provision
These Supreme Court decisions cite the provision above. We list them so you can read them yourself; the summaries of what each decided are not ours to give.
- Security Bank and Trust Company, Inc. vs. Rodolfo M. Cuenca, G.R. No. 138544, October 3, 2000 — read the decision on LawPhil →