Costs involved with buying and remortgaging property

There are various costs associated with buying or remortgaging property of any kind. This article focusses on the costs for landlords or property investors, when you are using a bridging loan, buy to let mortgage or commercial mortgage.

Some costs are paid when you take out the mortgage/loan, others are ongoing costs associated with the borrowing.

If for some reason you need to repay borrowing early, there may be charges for doing so. Situations that might cause you to do this and the costs involved are described within this guide.

Stamp duty

Stamp duty is short for Stamp Duty Land Tax. It is a tax imposed by the UK government on the purchase of properties. The SDLT rates and rules can vary depending on various factors, including whether the property is a second home or an additional property (such as a property you buy to rent out).

When it comes to second homes and additional properties, the SDLT rules are different compared to those for primary residences. The UK government introduced these additional SDLT rates and rules in April 2016.

Here are the key points to understand about SDLT on second homes and additional properties:

• Higher SDLT rates: Second homes and additional properties are subject to higher SDLT rates compared to primary residences. The additional rates apply to the entire purchase price of the property.
• Definition of second homes and additional properties: SDLT on second homes and additional properties applies when purchasing any property that is not replacing your main residence. This includes properties bought for rental purposes, holiday homes, and properties purchased for family members.
• Multiple property ownership: If you already own a property and purchase an additional property, you will generally need to pay the higher SDLT rates. However, if you sell your main residence within a specific timeframe (usually 3 years), you may be eligible for a refund of the higher SDLT paid.
• Married couples and joint ownership: If you are married or in a civil partnership, the ownership of one partner is attributed to the other. Therefore, if one partner already owns a property, the higher SDLT rates will apply to any additional property purchased by either partner.

It's important to note that SDLT rates and rules can change over time, so it's advisable to consult official sources or seek professional advice for the most up to date information when considering the purchase of a second home or additional property.

You can calculate stamp duty payable on a buy to let property purchase in England or Northern Ireland, using our buy to let stamp duty calculator.

In Wales there is a similar tax called Land Transaction Tax, and Scotland one called Land and Buildings Transaction Tax which, where applicable, comes with Scotland’s “Additional Dwelling Supplement”.

Lender fees

Property valuation costs

Lenders will get the property you are borrowing against valued, to ensure the loan amount they offer is based on a realistic price and that the property is a suitable security for the loan. Some lenders offer free valuations; others will pass on the cost of the valuation to you.

If you want to keep upfront costs low, let your advisor know you are interested in free valuation deals.

Product fees

Lenders often (but not always) attach a fee to their products, paid when you take out a buy to let mortgage. It can be a fixed sum or a percentage of the loan.

Commercial mortgages and bridging loans typically have a product fee, which is a percentage of the loan.

The fee can be called a product fee, booking fee or arrangement fee.

Some lenders will allow you to add this fee to the mortgage loan, but bear in mind this will increase your overall borrowing and may impact the total you repay as a result. It may also impact your loan to value.

If you want to keep upfront costs down, let your advisor know, they may be able to find you a product without a fee.

Legal fees

Conveyancing fees

In law, 'conveyance' means the legal process of changing the ownership of a property from one person to another. Conveyancing work is required whether you are investing through a buy to let mortgage, commercial mortgage or bridging loan.

So, conveyancing fees are the solicitor’s fees for buying a house.

The solicitor you use to do this work for you is critical to getting your deal completed efficiently. The subject of law is huge, not every solicitor specialises in conveyancing, especially where you are investing in residential or commercial rental property, or property you are flipping (doing up to sell for a profit).

Broker fees

We charge a fee for the work that we do, but we don't charge anything until we have invested our own time to find you a suitable mortgage or bridging loan. We do this so that we can demonstrate the value of what we do to you. We also split our fee into two parts, the majority is only paid once you have received the mortgage funds. This is so your investment in our work is based on us achieving success for you.

Our first job is to understand your wants and needs and do all the work required to identify a product that meets your specification, whilst keeping costs as low as possible.

We only charge for this work once you have confirmed to us that you are happy with the deal we have found for you, and that you want us to submit an application to the lender. At this point we charge a booking fee.

The majority of our fee isn't charged until the deal completes, so you can be confident that we have successfully done the job you trusted us with.

Tell our advisors about your property plans and they can confirm the applicable fees.

Monthly mortgage costs / loan costs

Lenders charge a monthly amount for borrowing money from them, which is based on the interest rate of your product.

Buy to let mortgages and commercial mortgages come with what is referred to as an 'initial rate period' or 'deal period', where a special interest rate is offered by the lender.

Bridging loans do not have initial rate /deal periods, because the term is over months, not years. So, the rate associated with a bridging loan applies for the whole of the term – the period over which you borrow the money.

Buy to let mortgage and commercial mortgage interest rates can be fixed (monthly payments are the same for the initial rate period) or variable (monthly payments can go up or down which is either directly related to, or influenced by, changes in either the Bank of England Base Rate, or London Inter-Bank Offered Rate).

Bridging loans interest rates are usually variable. Bridging loan payments are either “Serviced”, which means paid monthly, or “Retained”, which means the total interest payable is added to the overall borrowing and paid off when the loan is paid off in full at the end of the term.

What is an initial rate period?

The initial rate period, or deal/offer period, is a time-frame within which lenders offer a special interest rate for a buy to let or commercial mortgage. Initial rate periods don't apply to bridging loans (see below).

When the initial rate period of your mortgage ends, you can change to a new product without penalties (you can switch before this, but it may cost you money to do so, see “What are Early Repayment Charges?” below).

If you don't change to a new mortgage deal you will continue to be charged by your lender and the monthly cost is calculated using the lender's reversion rate (see “What are reversion rates and standard variable rates? below).

Do initial rate periods apply to bridging loans?

If you have a bridging loan, there is no 'initial rate period', the interest rate applies for the term of the loan. The period of the loan is only months in length, so reversion rates are not applicable.

What are reversion rates and standard variable rates?

If you don't arrange a new product, at the end of the 'initial rate period' or 'deal period', your mortgage charges are calculated based on the lender's reversion rate. This may be the lender's Standard Variable Rate (SVR) – a rate set by the lender that is influenced by (but not tied to or specifically tracking) the Bank of England Base Rate or the LIBOR (London Inter-Bank Offered Rate).

The SVR should not be confused with variable rate mortgages – they are different things – a variable rate mortgage is a deal-led product offered by lenders.

Lender reversion rates are typically higher than other mortgage deals available in the wider marketplace. This is why it is important to review the deals available, before you are charged based on the reversion rate. You can start this process 3-6 month’s ahead of the date your initial rate period comes to an end.

Payments based on a lender's reversion rate are likely to be considerably more per month than you have been paying. These payments are also likely to be a lot more than you would pay if you switched to a new mortgage deal.

A new mortgage deal can be secured from any lender. If the best deal available is with your existing lender, then a 'product transfer' can be made. A new valuation would not be needed, as the lender will have a record of the previous valuation they conducted. As a result, a product transfer typically has lower upfront costs than a remortgage.

Your advisor will look at the total cost of a product transfer versus a remortgage and recommend the most cost effective outcome for you.

Capital repayment mortgages

If you want to own your property outright at the end of your mortgage term, you will have to pay back the lump sum you borrowed, as well as the interest charged for borrowing that lump sum. This is referred to as making capital repayments.

If you choose capital repayments you will also pay the interest charged, so in essence your payments are capital and interest repayments, but it tends to get shortened in dialogue.

On a like for like basis, capital repayments will cost more than interest-only payments.

Interest-only mortgages

Landlord investment strategy is commonly to make money from renting the property, with no requirement to own the property outright at the end of the term.

One benefit of this is that, on a like for like basis, the cost of monthly mortgage payments will be lower. This is because you are only covering the cost of borrowing the money to buy the property, you are not paying back the money you borrowed.

Incidental mortgage costs you may incur

The costs above are all paid during the application process, at completion of the deal, or during the mortgage or loan term.

Below we explain Early Repayment Charges, these are not paid unless you need, or choose, to change your mortgage unexpectedly.

What are Early Repayment Charge (ERCs)

A lender makes money from the interest charged for lending to others. Therefore, if you repay your mortgage before the end of the initial rate period (not to be confused with the term of the mortgage – the total period over which you borrow the money), the interest due to be paid to the lender is lost to them as income.

To mitigate this loss of income, a lender may apply an Early Repayment Charge (ERC) to their mortgage products.

Typically, ERCs are based on a percentage of the loan. The percentage reduces the longer you have had the mortgage.

E.g. if you take out a five-year initial rate deal, the ERCs might look like this (ERC's vary by product) a gradual and stepped reduction in the percentage of penalty for each year of the initial rate period:

The percentage charge applicable in each date period can vary. It could look like this:

Whether or not ERCs are applicable for your particular mortgage, and any details (if applicable) will be outlined in the mortgage offer document issued by your lender and your advisor at Commercial Trust will discuss them with you ahead of any application being made.

If there is a high probability that you will have to change your mortgage in a given timeframe, discuss this with your advisor. Initial rate periods are commonly over 2, 3 or 5 years. Some products have no ERC periods, so if you need some flexibility this may be possible to achieve.

Do bridging loans have ERCs?

Bridging loans have more flexibility than mortgages. They are designed to accommodate more flexible end dates. You are not penalised for repaying them on an earlier date than you originally set out to - as with some mortgages - but there may be costs when you repay the loan.

The costs associated with repaying a bridging loan tend to be referred to as exit fees. The terms and conditions of the loan will dictate the cost associated with paying it back. Some lenders may charge a percentage of the loan amount when the loan is repaid in full (e.g. 1%) as an exit fee, others may only charge a smaller administrative cost.

Interest itself is only charged for the months the bridge was used over. E.g. if you took out a 12-month bridge, but repaid it in 9, you would not be charged interest for the 3 month's difference.

Bridging loans are subject to a minimum of one month's interest, so if you repaid within a couple of weeks, you would typically pay a full month's interest.

If you need flexibility on repayment of a bridging loan without penalty, make your advisor aware.

Landlords insurance

There are various insurances that you may need in your function as a landlord. These are summarised below. Insurances you may need in your personal life are not included.

As a landlord you will need to weigh up whether or not you need contents insurance, based on whether or not you own any contents in your rental property (don't forget, in a residential property, things like curtains, carpets, beds and white goods count as contents).

As a holiday let landlord, where you have to fully furnish your property, contents insurance is as essential as buildings insurance.

Rent guarantee insurance is designed to cover costs when a tenant does not pay the rent they owe.

Other insurances for landlords include: Home emergency cover, legal expenses cover, excess protection cover.

Commercial property can be even more complex and we come on to this in the section “Commercial property insurance”.

Why is buildings insurance a requirement of a mortgage?

Taking out buildings insurance is typically a requirement of a mortgage contract. This is because the property poses a financial vulnerability to the lender in a similar way it does to you, if it were to be damaged or destroyed.

What does landlord buildings insurance cover?

Buildings insurance for landlords is similar to any buildings insurance, but may overcome gaps in cover that might not be adequate with, for example, residential buildings insurance cover. So, you must use a landlord-specific buildings insurance product.

Typically, buildings insurance is designed to cover the cost of repair, or the full rebuild of a property, in case of disaster or accident, for example:

• Escape of water (burst pipes)
• Accidental damage
• Fire
• Structural failures as the result of subsidence, ground heave (which is the swelling of soil under the property when it becomes wet), landslip, storms, flooding, falling trees
• Theft

In order to get adequate cover for your property, you will need to prepare for the worst eventuality – its complete rebuild. An insurer needs an accurate figure for the cost to rebuild your property, to calculate the level of cover you will need.

If you are unsure what the rebuild cost of your property is, you can use a calculator supplied by the Building Cost Information Service (BCIS), which works in association with the Association of British Insurers:

Visit the BCIS residential rebuilding cost calculator.

Only the permanent, physical parts of the building are covered by buildings insurance – including fixtures and fittings. You may not be covered so that old items are replaced with new ones. If you want this, look out for “new for old” insurance cover.

If damage is made maliciously by tenants you may not be covered, think carefully about whether you want cover for this eventuality and look for it in the products you compare.

Fittings and fixtures insurance for leasehold landlords

If you are the leasehold landlord of a property you are renting out, and may not be responsible for the building itself, so may not need full buildings insurance, you could opt to take out fittings and fixtures insurance to ensure the elements you have paid for are covered.

Contents insurance

Landlords are not responsible for taking out insurance to cover their tenant's possessions. Tenants need to take out their own cover. However, as a landlord, you may need cover for items you have provided in the property such as beds, wardrobes, white goods, curtains and carpets.

You need specific landlord’s contents insurance as opposed to generic home contents cover, due to the different risks associated with rental property.

Landlord contents insurance can be for full or limited cover.

• Full cover might include repair or replacement of contents, cover for temporarily removed items, loss of rent or re-letting costs after damage, cover during a given period when a property is vacant, emergency assistance, accidental or malicious damage.
• Limited cover may only cover repair or replacement of goods and not cover other extras or circumstances.

Each insurance company policy and cost will vary, so be sure to check the extent of the cover in detail when comparing costs.

Commercial property insurance

Due to things like the different function and size of commercial premises, insurance cover for such property is different and can include things like:

• Property insurance – which is an extension of buildings insurance, but may offer additional cover for things like landscaping, solar panels, wind turbines, domestic white goods and more – either as standard or by getting a tailored policy from an insurer.
• Business interruption / Loss of rent – this cover is designed for loss of rent when a commercial property has been damaged, if you have a semi-commercial property which has residential units, this cover may include the cost of housing tenants elsewhere.
• Engineering damage – damage to property may be as the result of machinery failure. If your property is adjacent to or houses machinery that could cause damage, this type of cover could be suited to your needs.
• Public liability – covers the cost of your legal responsibility for any injuries to third parties when onsite at your property.

Insurers may offer landlords of commercial property optional extras to cover things like:

• Employee injury claims
• New-for-old cover for contents
• Theft by a tenant
• Malicious damage by a tenant
• Legal expenses
• Subsidence cover, in case the land beneath your property caves-in or sinks (subsides), is subject to ground heave (it expands or pushes upwards) or landslip.
• Personal accident
• Terrorism

Letting agent fees

You may choose to manage the letting of your property yourself. But, many landlords have a primary occupation outside renting homes, or for other reasons choose to use a letting agent to manage their property. There are fees associated with this work, which vary by company and service level.

The tiers of help you can get from a letting agent are:

1. Tent find – simply that, the agent will advertise your property. Viewings, references, Right-to-Rent checks, set up of tenancy agreement and taking of an inventory may also be included – check this, if you want this help.
2. Rent collection – once your tenant has a move in date, you may be happy to take on handling maintenance, arranging gas and electrical checks and other ongoing landlord work. But, you might want an agent to handle the collection of rent. This service is sometimes combined with a 'Tenant find' service. Your agent may include in this chasing missed rent arrears and the serving of notices.
3. Fully managed – a fully managed service from a letting agent takes care of all the day to day and ongoing work involved in running a tenancy, to include both of the above services, inventories, managing maintenance issues, inspections, deposit protection and disputes. Legal responsibility for the property remains with you, the landlord.

Other things to look for when choosing a letting agent:

• Membership of Propertymark, the professional body for property agents, which launched in February 2017, to combine five associations (Association of Residential Letting Agents (ARLA); National Association of Estate Agents, UK, (NAEA); National Association of Valuers and Auctioneers (NAVA); Institution of Commercial and Business Agents (ICBA); and Association of Professional Inventory Providers (APIP).
• Membership of the Client Money Protection Scheme (CMP), which is a requirement of being a Propertymark member, is designed to reimburse landlords and tenants if “a letting agent misappropriate their rent, deposit or other client funds” (source: Propertymark.co.uk).
• Professional indemnity insurance – this insurance is to cover the cost of claims made against the letting agent by you as their client or other third parties. Claims may arise from negligent advice or services the agent has provided.
• Membership of one of the following dispute resolution schemes, each website provides a member search function: The Property Ombudsman Scheme or Property Redress Scheme.

Energy Performance Certificates

Landlords must have an Energy Performance Certificate (EPC) for their rental properties. A copy of the EPC must be provided to prospective tenants, free of charge, at the earliest opportunity (e.g. at the viewing).

If your property is in England, Wales or Northern Ireland, visit the UK government website to find your EPC.

If your property is in Scotland, visit the Scottish Energy Performance Certificate Register website to find your EPC.

EPC certificates must be provided when you buy, sell or (as above) rent property. They have a 10-year expiry date. EPC certificates must be displayed in properties, in Scotland.

To get or renew an EPC certificate, you will need to have an Energy Assessment Survey conducted at your property.

If you use a letting agent, they may have a relationship with a local assessor. However, costs vary, so you may want to make enquiries direct to compare prices.

You can look up an EPC assessor on the UK government website:

Find an EPC assessor for property in England, Wales or Northern Ireland.

Or, if you have property in Scotland, visit the Scottish Energy Performance Register online and use the “Find an Assessor/Advisor” service.

EPC regulations required rental property to achieve an EPC rating of “E” from 1st April 2020. However, after a consultation in December 2020, changes to the requirements were announced, whereby a rating of “C” or above must be achieved for new tenancies by 2025 and then for all tenancies by 2028.