The guarantee commission: How can you save money when remortgaging?

Aske Buemann

CEO & Co-founder

Guarantee commissions

How does the guarantee commission work?

When remortgaging your mortgage, there's an important financial factor you may not have thought about: the guarantee commission.

What is warranty commission and when do you pay it?

When you want to remortgage your mortgage, a registered mortgage deed must be established before you can have the loan disbursed. Usually, you may want to have the loan disbursed earlier so that it can be used to repay the previous loan. To meet this need, the bank provides a guarantee to the mortgage company. Some banks charge a fee for this guarantee, known as guarantee costs or guarantee commission. As a homeowner, it is your responsibility to report these costs to the Danish Tax Agency. The amount you have paid as guarantee commission will typically appear in the calculation from the bank in connection with the loan restructuring.

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Is the guarantee commission tax deductible?

Yes, you can actually get a tax deduction for the guarantee commission.

Up to 80% of people who remortgage overlook this potentially significant deduction. Some lenders have started reporting some of these commissions to their customers. Therefore, it's a good idea to check with your bank to see if they have reported all your tax deductions on your annual statement when you take out the loan. In addition to savings on interest costs, this deduction can potentially save you thousands of dollars.

Why can you deduct the guarantee commission from your taxes?

Normally, you can deduct commissions on loans that have a term of less than 2 years. This applies, for example, to consumer loans where the origination fee is deductible. The guarantee commission is deductible as this loan is temporary until your actual loan is disbursed. Since the term of this temporary loan is almost always less than 2 years, the tax authorities consider it a form of origination fee.

Is there an upper limit to the deduction?

The amount of the guarantee commission can vary and in some cases run into thousands of dollars. In short, the answer is no to whether there is an upper limit, but theoretically, challenges can arise if the guarantee commission is disproportionate to the principal amount of the loan. However, this rarely happens in practice. If it does, it is a good idea to consult the tax authorities.

Is the deduction available to everyone when remortgaging?

No, the deductibility depends on the specific agreement you have with your bank, as there are different ways of providing security for the loan. One of these is a guarantee commission, where the bank acts as collateral. Another common method is a fixed rate agreement - not to be confused with a fixed-rate mortgage. A fixed rate deal means that the bonds you need to purchase in connection with your loan are acquired at a fixed bond price, which is often significantly lower than the actual price.

This can end up being more expensive than using the guarantee commission. Therefore, when considering remortgaging, it's important to ask for calculations for both the fixed rate agreement and the guarantee commission.

Is the deduction automatically reported on your annual statement?

In many cases, your guarantee commission deduction is not automatically reported to the tax authorities, which means it will not automatically appear on your annual tax return. Therefore, when you remortgage your loan, it's important that you thoroughly check that this deduction has been reported correctly to the tax authorities and will appear on your annual statement when it's available in March.

Why isn't the guarantee commission reported automatically, just like interest?

There is no single reason for this. One possible explanation could be that there were fewer loan refinances in the past due to smaller fluctuations in interest rates. This may have meant that the tax authorities did not prioritize automating this specific deduction.

Tax authorities have limited resources and naturally prioritize tasks that they consider to create the most value for citizens. Because the amounts in the past were often relatively small, they have likely chosen to focus on deductions that had greater financial significance. We can hope that future updates include automation of both foundation commission and guarantee commission, which would make it as easy to get this deduction as it is to get the interest deduction on the annual statement

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