An interesting case came up today with the settlement of a refinance. I'm interested to hear the legal and tax perspective on this... When a refinance occurs, the outgoing lender provides a payout figure to the new lender which is calculated to a specific date on which the settlement of the refinance will occur. Included in this payout figure is: * Remaining principal to be paid. * Fees from the outgoing lender such as break fees (if a fixed rate) and discharge fees. * Interest incurred on the loan since the last scheduled repayment. On top of this, the new lender will also charge various fees, which are usually being paid by the new loan being set up: * Application & settlement fees. * Government fees. As a result, the new loan being set up is going to be a little higher than the original loan to cover the various costs involved. For an investment loan I don't imagine there's any questions about deductibility of the various fees being charged, but... What about the interest incurred by the outgoing lender since the last payment? Wouldn't adding this to the payout figure be considered capitalising interest? I'd suggest the interest accumulated since the last repayment should be charged to the borrowers nominated direct debit account. It shouldn't be capitalised onto the loan. When investigating this however, it appears that capitalising the interest to the payout figure is standard practice with every lender I've asked. Furthermore it's an automated process and alternate arrangements can't be made.