Remortgage Costs and Tax Impacts on Rental Properties

Remortgaging rental properties can help landlords secure better interest rates or release equity, but it’s crucial to understand the associated costs and tax implications. These factors affect both immediate cash flow and long-term profitability.

Legal and Valuation Fees

Legal and valuation fees are key considerations when remortgaging rental properties. Legal fees cover the services of a solicitor or conveyancer who manages the paperwork, property searches, and regulatory requirements. These costs vary depending on the complexity of the transaction and the property’s location. Urban properties, for instance, may incur higher legal fees due to more intricate zoning regulations.

Valuation fees are charged by lenders to determine the property’s current market value, which influences the equity that can be released and the remortgage terms. These fees, which depend on property size and location, can range from a few hundred to several thousand dollars. Some lenders include free valuations as part of their remortgage packages, so landlords should compare offers.

Early Repayment Charges

Early repayment charges (ERCs) can affect the decision to remortgage. These penalties are imposed by lenders if a borrower pays off their mortgage early, compensating for lost interest income. ERCs are typically a percentage of the remaining loan balance and vary depending on the lender and original mortgage terms.

Some lenders maintain a fixed ERC percentage throughout the mortgage term, while others reduce the penalty over time. This distinction is important for landlords remortgaging early in the loan term. Products without ERCs are also available and may suit those seeking greater repayment flexibility.

Broker and Arrangement Fees

Mortgage brokers, who help borrowers find suitable mortgage products, contribute to the overall cost of remortgaging. Their fees can be a flat rate or a percentage of the loan amount, often around 1%, depending on the complexity of the deal and the broker’s reputation.

Lenders also charge arrangement fees for setting up the mortgage, which can be a fixed amount or a percentage of the loan, typically from $500 to $2,000. Some lenders allow these fees to be added to the mortgage balance, easing immediate costs but increasing the loan’s overall expense due to accruing interest. Comparing lender offers is essential, as some may waive arrangement fees for larger loans.

Tax Implications

The tax implications of remortgaging rental properties can influence both short-term cash flow and long-term financial planning. Funds released through remortgaging are generally not considered taxable income. However, if the equity is used to improve the rental property, the interest on the additional mortgage amount may be deductible as an expense against rental income under Internal Revenue Code (IRC) Section 163.

This interest deduction is subject to limitations under the Tax Cuts and Jobs Act of 2017, which caps deductions for interest on home acquisition debt. Landlords should document how remortgage funds are used to ensure compliance and maximize deductions. Additionally, remortgaging for property improvements may affect capital gains tax calculations when the property is sold, as the cost basis may be adjusted for these improvements.

Stamp Duty Considerations

Remortgaging generally does not incur additional stamp duty, as it involves refinancing an existing loan rather than purchasing new property. This can be a relief for landlords, given the substantial costs associated with stamp duty in property transactions.

However, stamp duty may apply if the remortgage involves transferring ownership or adding a new party to the mortgage. For example, adding a partner could trigger stamp duty on the transferred portion of the property interest. Rates and thresholds for stamp duty vary by region, such as between England, Scotland, and Wales. Consulting with a tax advisor or solicitor can help clarify obligations and avoid unexpected liabilities.