August 6th 2025
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Can You Deduct Mortgage Interest on a Rental Property?
The tax landscape for buy-to-let landlords has shifted and knowing how the new system works is essential to managing your rental income effectively.
Amendments within Section 24 or the Finance (No.2 ) Act 2015 now mean that deducting mortgage interest from rental income isn’t as straightforward as it once was.
Many budding property investors ask us the question, “can I deduct mortgage interest on my rental properties?” The answer is: you can claim relief but it comes in the form of a tax credit.
While this new system isn’t as generous as the old rules for higher-rate taxpayers, who essentially received 40% tax relief on mortgage payments, you can still enjoy tax-saving benefits by taking the right measures.
Here we look at mortgage interest rates for landlords and how to claim tax relief on your payments.
Table of Contents
FYI: Currently, the average two-year fixed buy-to-let mortgage interest rate (based on a 75% loan value) is around 4.28%, although this could be subject to change with the upcoming Bank of England announcement.
Buy-to-let mortgage rates are the same as traditional interest rates in the sense that you pay a fee to borrow the funds to acquire a property (or properties), which is typically based on a pre-agreed percentage.
The key difference is that as buy-to-let mortgages, compared to traditional ones, are specifically designed for those looking to become buy-to-let landlords—interest rates are slightly higher.
However, like any mortgage product or financing model, buy-to-let interest rates are governed by a range of factors, including borrowing trends and the state of the economy.
In conversation with ‘what Mortgage’, Jonathan Samuels, CEO of property finance specialist Octane Capital, gave his opinion on buy-to-let mortgage rate trends:
“Since the Budget, we’ve seen swap rates creep up and this has inevitably caused buy-to-let mortgage rates to follow suit.
“This is due to the fact that many lenders in this market rely on swaps to lend at fixed rates, and the funding lines are priced in relation to swap prices. So, whilst the base rate has not moved, the funding cost to lenders has gone up.
The good news is that both swap rates and buy-to-let mortgage rates remain far more palatable than they were a year ago and so, at present, many lenders are opting to take the hit on the margin in hopes of a future reduction.
As a result, there remains a good level of opportunity for buy-to-let investors to secure a mortgage at a lower rate than they would have a year or so ago.
However, the longer this goes on, the more likely they are to pass on this increased cost to borrowers via higher mortgage rates.”
– Jonathan Samuels, CEO, Octane Capital
Buy-to-let mortgage rates often fluctuate, but they’re stable at present. By understanding the type of tax relief you can get as a landlord under the current system, you can mitigate certain costs and drive a healthy level of profit from your investments
How do you claim the mortgage interest on a rental property?
The new system under Section 24 was phased in between tax years 2017/18 and 2020/21, and resulted in droves of landlords selling their rental properties or transferring their portfolios to limited company structures.
Now, rather than deducting all of your buy-to-let mortgage interest directly from rental income before tax, you’re entitled to a 20% tax credit.
Mortgage rate-based tax relief is typically calculated based on the lowest of three amounts:
- The total finance costs: these include all interest payments on loans for the rental property.
- The property’s net profit before finance costs: this is essentially your rental income minus all allowable expenses except for finance costs.
- The adjusted total income for the tax year: this is how much your total rental income plus other income earned in the year (excluding savings income and dividends) and after eligible losses and reliefs exceeds your Personal Allowance.
To claim your 20% tax credit, you must diligently keep records of all rental income and expenses, including mortgage interest payments.
Whether you operate as a sole trader or a limited company, you must report your gross rental income and deduct any allowable expenses. Here, if you own the property personally, you can factor in the 20% tax credit on mortgage interest to accurately work out your tax liability.
20% mortgage interest rate tax credit for landlords: a calculation
If you take in £800 per month rental income, for instance, and make mortgage interest payments of £300 per month, you’ll:
- Pay tax on the full £9,600 rental income you earn (£800 x 12 months).
- Pay £3,600 in annual mortgage interest (£300 x 12 months).
- Receive a tax credit of £720 (£3,600 x 20%).
Based on these numbers:
- You’ll pay £1,200 as basic rate taxpayer (calculated as (£9,600 x 20%) – £720 tax credit = £1,920 – £720).
- You’ll pay £3,120 as a higher rate taxpayer (calculated as (£9,600 x 40%) – £720 tax credit = £3,840 – £720).
FYI: This calculation is a basic example of how mortgage interest relief works for UK landlords, using a fixed 20% tax credit. However, it doesn’t include other potential deductible expenses (repairs, letting agent fees, and insurance, for example), personal allowances, or other income you may have as a landlord. All these variables can affect your final tax liability.
For professional tax guidance, you can talk to our trusted property tax and finance partners FCF for advice tailored to your property investment situation.
Maximising your deductions as a landlord can significantly reduce your tax liability on rental income and make your final tax bill more favourable.
Let’s look at the allowable expenses you’re potentially eligible for as a landlord and the type of expenses that aren’t tax-deductible.
Allowable rental expenses for buy-to-let landlords
As a landlord, there are costs directly associated with the upkeep and general running of your rental property. You deduct these costs from your rental income prior to tax calculation.
| Expense | Expense Description | Estimated average cost |
|---|---|---|
| Letting agent fees | Fees paid to agents for tenant recruitment and property management. | £500 to £1,500 per year. |
| Service charges and ground rent | Fees charged by management entities or freeholders for the upkeep of communal areas or facilities. | Up to £1,792 per year |
| Insurance | Premiums for building and contents insurance covering various risks. | Around £260 per year. |
| Repairs and maintenance | Costs incurred in maintaining the property’s condition, excluding any improvements. | £1,374.07 per year. |
| Mileage expenses | Costs for travel essential to managing the property, such as inspections or overseeing repairs. | Varies greatly depending on the individual. This is typically calculated at 45 pence per mile. |
| Accountancy fees | Professional fees for the preparation of tax returns or management of the property’s finances. | Between £100 and £175 per month, per property. |
| Council tax and utilities | Costs borne by the landlord during periods when the property is vacant. | The average annual council tax bill for a Band D property is £2,171. However, specific annual council tax bills and utility costs vary greatly depending on location and property. As a landlord, you’ll typically only incur these costs during void periods. |
Non-allowable rental expenses for buy-to-let landlords
These are the costs you cannot deduct from rental income for tax purposes and factor into your tax return.
- Capital expenditures: These are costs related to property enhancements that boost its market value. These include building extensions or major renovations.
- Personal expenses: Any spending that’s not directly linked to the property’s maintenance or operation, including the personal use of furniture.
- Loan repayment principle: You can’t include the principal portion of mortgage payments in your deductible expenses.
- Mixed-use expenses: To ensure your tax returns are compliant, you should only declare expenses that are solely for your buy-to-let properties rather than any spending that may blur the lines between investments as a landlord and personal expenditure.
“If costs are for a mixed use then the element relating to the running of the buy-to-let property can be deducted as an expense providing that it has been incurred wholly and exclusively for the property business. Where possible it is advisable to obtain a separate invoice for the buy-to-let business and personal element, an example of this would be if your rental property and your private property shared a garden and you used a gardening service to maintain the whole of the area.
To ensure all expenses paid for the running of the rental property are claimed against an accurate total for the rental income received it is recommended that a separate bank account is opened for Property transactions only and that all payment and receipts are reflected in this account. This approach has the added benefit that if HM Revenue and Customs decide to check your reported property income they can only request the bank statements for your specific property account. If your income and expenses are received into and paid out of your personal current account they would have access to these statements and be able to look into all your personal financial transactions without needing any reasonable justification for such a request.
If you consult an accountant or qualified tax advisor to assist with the submission of your tax return they will be able to ensure you claim all the available expenses and help you differentiate between business and personal expenses.”
– Lisa Calvert, Ford Campbell Freeman
FYI
If you’d like to reduce your property acquisition costs, searching for below market value investment opportunities is a wise move. If you’re searching for a below marketing value property that suits your investment needs, we have a range of opportunities across the UK.
When filling in your self-assessment tax return, you must accurately report the mortgage interest from your rental property. Here’s how.
Property pages section
- Navigate to the section in your HMRC account labelled either ‘Property’ or ‘Residential property’ on your tax return.
- Within this section, locate a box marked ‘Residential property finance costs.’
- Add in the total mortgage interest you’ve paid on the rental property during the tax year.
Insider advice and guidance…
✔️ This process is applicable to residential rental properties only
✔️ For non-residential properties, you can deduct your entire mortgage interest as an expense which you’ll need to report in a different section of your tax return.
✔️ You don’t need to manually enter the 20% tax credit for mortgage interest. It will be calculated automatically based on the details you provide.
“The change in the tax treatment of finance costs can lead to some buy-to-let landlords becoming higher rate tax payers because the rental taxable income is the figure before any finance costs are deducted. This can have several potential knock-on effects depending on your personal circumstances and other income , for example if you or your partner are receiving child benefit the increase may take you over the High Income Child Benefit Tax Charge threshold.
The impact of the increased amount of taxable rental income taking you into higher rate tax could possibly be reduced or eliminated if you choose to make payments into your personal pension scheme (depending on your eligibility) or make Gift Aid donations. Both of these options increase your basic rate band and keep the rental income tax at 20% which will match to the 20% tax relief given on the finance costs. This should mitigate the additional 20% tax charge on the element of your income that would have fallen within the higher rate tax band.
The amount of pension contributions or Gift Aid donations needed to ensure your rental income is taxed at an effective rate of 20% will depend on your level of income from all sources and will require tax planning prior to the tax year end.
Consulting your accountant or a qualified tax advisor to assist with this planning may help to mitigate additional tax liabilities.
If you own your property in your sole name and have a spouse or civil partner who is a basic rate tax payer you could consider transferring the property into their name. There would not be any capital gains tax payable on this transfer due to a specific relief available to married couples and those in a civil partnership. You should be aware that the transfer will move the value of the asset into the new owners estate and your own and your partner’s Will may need updating to reflect this transfer and to ensure the asset continues to be bequeathed to the person you wish to receive it. Again advice should be sought to assist you to evaluate the benefit in reduced tax compared to the costs of affecting the change.“
– Lisa Calvert, Ford Campbell Freeman
Rental demand across the UK is strong right now and with average gross UK rental yields standing at 7.03%, being a buy-to-let landlord is potentially profitable.
While this may be the case, to earn sustainable profits and reduce your tax burden as a buy-to-let landlord, you have to be strategic.
As you can no longer deduct your mortgage interest from your tax bill directly, you could risk falling into a higher rate tax bracket—eating into your profit margins in the process.
By following this guide, you’ll ensure you factor in all legitimate tax deductible expenses when submitting your return while getting the best possible financial benefits from the revised 20% tax credit.
If you operate as a sole trader or as an individual property investor, switching to a limited company may also be a viable option. Why? You’ll benefit from greater flexibility over your finances while potentially reducing your tax burdens.
If you’re considering making the switch to a more business-based model, read our official guide on the advantages and disadvantages of setting up a limited company.
Disclaimer: This advice is based on our experience as property investment professionals and is here to help guide your choices. However, we’re not legal advisors or tax experts. You should always request assistance from registered tax or legal professionals before making any firm decisions.
While you can benefit from a 20% tax credit as a buy-to-let landlord, you can’t directly deduct your mortgage interest payments from your tax return. You can utilise this tax credit when filling in your tax return and our official guide explains all you need to know on the subject.
Yes, owning a mortgage on your property doesn’t exempt you from paying tax on your rental income. Having a mortgage has no direct impact on the tax liability for the income you earn from your property.
Here’s a closer glance at how taxation on rental income operates:
- Taxable rental income: The rent collected from your property is seen as taxable income and must be reported to HMRC.
- Mortgage interest rental property deductions: You can no longer deduct the full amount of mortgage interest from your rental income before tax.
- 20% Tax Credit on certain expenses: As a UK landlord, you are eligible for a 20% tax credit, which is applied to the lesser of your total finance costs. These include property net before finance costs and your adjusted total income.
Yes, there are certain expenses you can claim as a buy-to-let landlord which you can declare when filing your annual tax return. These include:
- Letting agent fees
- Service charges and ground rent
- Insurance
- Repairs and maintenance
- Mileage expenses
- Accountancy fees
- Council tax and utilities
If you’re unsure about a particular expense, talk to a trusted tax expert who will guide you through the process.
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