There are lots of reasons that you might want to remortgage as a homeowner. You may want to release equity to make home improvements, to consolidate debts or simply to get a better interest rate on a new product. When you first start looking at a remortgage, the first thing to establish is the overall costs involved – and included in these figures should be what fees to expect and taxes involved.
When you work with a mortgage broker, you can get a clear picture of the costs involved so you understand. But here’s a basic picture of how the process works.
Do you need a solicitor to remortgage?
One question often asked is whether you need a solicitor to remortgage. The answer is yes, you do because there needs to be an appointed conveyancer to manage the legal charge form from one lender to another. Many times, you will be paid legal fees on the original mortgage, but the good news is that these are usually lower on a mortgage.
Free legal versus your own solicitor
Some lenders do have their own solicitors that you can use free of charge. The main downside with this is that they are often swamped with work and the process can be delayed while waiting for them to do their side of things. This can mean it takes much longer to get your money than it should.
On the other hand, if you pay a solicitor to handle the matter, you receive the standard of a paid service. So it can be worth biting the bullet and paying for a solicitor of your own where possible.
Cashback on solicitors
One thing to watch – if a lender offers free solicitor services and you don’t use them, you may be able to get cash back from them. That’s because the mortgage company would normally pay the fees as part of the package but if you don’t use their solicitor, they save money – and should offer some of that to you.
How much are legal fees?
Different solicitors will have their own costs involved but the average cost of conveyance fees on a remortgage is around £300 which is payable to the lender. This increases by the value of the property and if there are issues such as the tenure or transfer of equity to be handled.
If you have free solicitor fees with the mortgage, there still may be fees to pay if there are extra matters outside the normal process. One example is if you are remortgaging after a breakup and need to buy out your ex-partner. So a free service may still cost you money, depending on the situation.
What other fees are involved?
Legal fees are one area you may have to pay out money to remortgage but there are other things that you might have to cover the costs. Examples include:
- Remortgage arrangement fees
- Booking fees
- Valuation fees
- Early repayment charges and exit fees for your old mortgage
Remortgage arrangement fees
Most mortgage companies charge a fee to set up a mortgage and how much this is varies between lenders. Some use a fixed amount while others charge a percentage fee. Others may charge no fee at all. You can use the fees as part of the decision about who to take your mortgage with.
Remortgage deals with lower interest rates tend to have higher arrangement fees. This is so they don’t add the amount to the mortgage and that you pay interest on it. Fees are non-refundable even if the mortgage breaks down. It is worth working out the tipping point, the point where the fee results in a lower overall cost.
£150K loan over 25 years with a 2-year agreement:
- 5% fixed rate with £995 fee = approx. £600pm, = £14,400 + 995 = £15,395 total cost over 2 years
- 8% fixed with £0 fees = approx. £630pm, = £15,120 total cost over 2 years
In this situation, the higher rate free deal is better by around £275.
£500K loan over 25 years:
- 5% fixed with £995 fee = approx. £2,000pm, = £48,995 total cost over 2 years
- 9% fixed with £0 fee = approx. £2,095pm, = £50,280 total cost over 2 years
Here the lower rate with a £995 fee is better by around £1285 overall.
Booking fees can be charged by lenders and are usually around £100-200 which are paid upfront, non-refundable and can’t be added to the mortgage.
Most of the time, a mortgage company will want a valuation to confirm the value of the property before confirming the mortgage. They may appoint their own valuer or surveyor and cover the costs while others may make you pay for it. Valuation fees can be anywhere from £250 to £1500 depending on the size and value of the property.
Early repayment charges and exit fees
Most lenders will charge a fee if you leave a deal before it finishes, and it is worth checking to see what this is before making a decision. It could make a big impact on whether the remortgage is worth doing or not.
Early repayment charges can depend on the mortgage. Sometimes they are a simple percentage of the loan which decreases over the length of time you have had it. Borrowers on lender standard variable rates don’t have to foot these charges but they are usually smaller, £50-200 generally and are more an administrative fee for dealing with the account.
Is mortgage fees tax deductible?
If you are looking at a buy to let property, there are some situations where remortgage costs are tax deductible. Before the changes to tax relief, lenders fees and costs for remortgaging were fully tax deductible against rental profits. But under the new system being phased in, there is a cap on how much you can put against tax, currently 20%. This rate is based on you being on the basic taxpayer rate and will change:
- Before 2017 – 100%
- 2017-18 – 75% previous system, 25% new system
- 2018-19 – 50% previous and new system
- 2019-20 – 25% previous system, 75% new system
- Post-2020 – 100% new system
Finance fees cannot be deducted from capital gains tax, no matter whether you initially claimed it as expenses or not. However, capital gains tax is also only payable on the sale of a property, not when you remortgage.
Tax for limited companies
With buy to let properties for limited companies, the difference is with the way that tax is paid – as corporation tax rather than income tax. Once rental income has been paid into limited company profits need to be distributed via a dividend. The first £2K is tax-free but the rate rises the more you take. Property is also subject to corporation tax when it is sold.
Changes in 2017 also mean that portfolio landlords will have their properties assessed as a whole but if one property is underperforming, this will have an impact on the whole portfolio.
Stamp duty and Land Registry fees
The cost of fees from the Land Registry can be anywhere from £20 to £910 depending on the value of the property.
Stamp duty is only payable if there is a transfer of legal title of the home as part of the remortgage. This is if you are passing the property to a family member or moving in with a partner. There are a couple of situations where you may have to pay stamp duty:
- When transferring a share to a spouse after marriage, entering a civil partnership or moving in together
- When transferring from a company
- When taking a larger share of the property previously under joint ownership
- If two or more people jointly own the property and divide it up
- When transferring an interest in land after a court order or agreement due to divorce or separation
- If the transfer is a gift
You can visit the HMRC website to find out more information about stamp duty charges and whether they might apply to your remortgage.