Mortgage Payments vs Mortgage Interest: What Tax Relief Can Landlords Claim?

Understanding the difference between mortgage payments vs mortgage interest is essential for UK landlords who want to calculate their rental profits correctly and avoid paying unnecessary tax.

Many buy-to-let landlords assume their entire monthly mortgage payment can be deducted from rental income when calculating their taxable profits. Unfortunately, this is not how UK property taxation works.

A mortgage payment can contain two different elements: the repayment of borrowed capital and the interest charged by the lender. Although both affect your cash flow, they receive very different treatment for tax purposes.

The rules become even more complicated when considering Section 24 mortgage interest restrictions, higher-rate taxpayers and properties owned through limited companies.

Whether you own one rental property or manage an extensive portfolio, understanding these distinctions can help you complete your Self Assessment accurately and make informed financial decisions.

In this guide, Taxes Done Right Ltd explains how mortgage payments are treated, what relief is available, and the common mistakes landlords should avoid.

1. Mortgage Payments vs Mortgage Interest: Understanding the Difference

Before exploring tax relief, it is important to understand how mortgage repayments work.

Most buy-to-let mortgages fall into two categories: repayment mortgages and interest-only mortgages.

With a repayment mortgage, your monthly payment covers both the interest charged on your outstanding borrowing and a portion of the original loan.

With an interest-only mortgage, your monthly payment generally covers the interest without reducing the outstanding capital balance.

For example, suppose you own a rental property with the following mortgage arrangements:

Mortgage details	Amount
Outstanding mortgage	£180,000
Monthly mortgage payment	£1,100
Interest element	£700
Capital repayment	£400
Annual mortgage payments	£13,200
Annual interest	£8,400
Annual capital repayments	£4,800

In this simplified example, only the £8,400 interest element is potentially eligible for property finance cost tax relief.

The remaining £4,800 represents repayment of money originally borrowed and does not qualify.

This distinction applies even though the entire £13,200 leaves your bank account.

The most important principle is that taxable rental profit is not necessarily the same as the cash remaining after mortgage payments.

2. Can Landlords Claim Mortgage Repayments as an Expense?

One of the most common misunderstandings among landlords is that all mortgage repayments qualify as rental expenses.

Unfortunately, mortgage capital repayments are not tax-deductible.

When you repay capital, you reduce an existing debt rather than incur a deductible cost of running the rental business.

Consider a landlord who purchases a buy-to-let property using a £200,000 mortgage.

Over several years, the landlord repays £30,000 of the outstanding borrowing.

Those repayments increase the landlord’s equity in the property, but they cannot be deducted from rental income when calculating taxable profit.

HMRC specifically excludes capital repayments from mortgage finance cost relief.

This principle applies to properties held personally and properties owned through limited companies.

However, mortgage interest may qualify for relief, depending on the ownership structure and how the borrowed funds have been used.

Landlords should therefore avoid categorising all mortgage payments as expenses in their bookkeeping software.

Instead, they should separate capital repayments from interest using their mortgage statements or annual interest certificates.

3. What Is Section 24 Mortgage Interest Tax Relief?

Section 24 fundamentally changed the way individual landlords receive tax relief on residential mortgage interest.

Historically, qualifying mortgage interest could generally be deducted from rental income before calculating taxable profits.

This allowed landlords to obtain relief at their marginal Income Tax rate, potentially 40% or 45%.

However, the government gradually restricted this relief between April 2017 and April 2020.

Since 6 April 2020, individual landlords generally cannot deduct residential mortgage interest directly from rental income.

Instead, qualifying finance costs are used to calculate a basic-rate Income Tax reduction, normally 20%.

The distinction is particularly important for higher-rate and additional-rate taxpayers.

For example, a landlord paying £10,000 in qualifying annual mortgage interest might receive a tax reduction of £2,000, subject to the relevant limits.

However, they cannot simply deduct £10,000 from residential rental profits as they could before the restriction.

HMRC provides a detailed explanation of the residential landlord finance cost restriction.

The restriction generally affects individual residential landlords, including individuals letting property through partnerships.

Limited companies are not subject to Section 24 in the same way.

4. How Mortgage Interest Tax Relief Works in Practice

To understand the effect of Section 24, consider a landlord receiving £18,000 annually from a residential rental property.

The property has £3,000 of allowable running expenses and £9,000 of qualifying mortgage interest.

The calculation would look as follows:

Description	Amount
Annual rental income	£18,000
Allowable running expenses	(£3,000)
Taxable rental profit before finance cost relief	£15,000
Mortgage interest	£9,000
Potential 20% tax reduction	£1,800

The landlord’s property profit for Income Tax purposes is £15,000, rather than £6,000.

The £9,000 interest is considered separately when calculating the tax reduction.

Assuming the landlord has sufficient property profits, adjusted total income and Income Tax liability, the potential reduction is £1,800.

This example highlights why landlords should not calculate their tax solely from the money remaining in their bank account.

The tax reduction is applied to the Income Tax calculation rather than being treated as a conventional property expense.

The final liability also depends on the landlord’s other taxable income, available allowances and applicable tax bands.

5. Why Higher-Rate Taxpayers Can Be Disadvantaged

The Section 24 restriction can have a significant impact on landlords paying higher-rate Income Tax.

Under the previous rules, a landlord paying 40% Income Tax could potentially receive £4,000 of tax relief on £10,000 mortgage interest.

Under the current restriction, qualifying interest generally generates a maximum basic-rate reduction of £2,000.

This produces a potential difference of £2,000 in tax relief.

There is also another important consequence.

Because residential mortgage interest is no longer deducted from the individual’s rental profit, the reported taxable income may be considerably higher than their actual rental cash surplus.

This can push individuals into a higher tax band or affect calculations involving adjusted net income.

Possible consequences include reduced Personal Allowance, an increased High Income Child Benefit Charge or additional student loan repayments.

These effects depend on individual circumstances.

Landlords with employment income alongside rental income should pay particular attention to how their combined income affects their tax position.

A rental business generating modest cash flow can still create a substantial Income Tax liability.

6. Are Basic-Rate Taxpayers Affected by Section 24?

Basic-rate taxpayers are also subject to the residential mortgage interest restriction.

However, the financial impact may be less significant where all relevant rental income remains within the basic-rate band.

For example, a landlord paying Income Tax at 20% may find that the mortgage interest tax reduction broadly produces the same immediate tax saving as a 20% deduction would have provided.

Nevertheless, this is not guaranteed.

A landlord’s taxable rental profit is calculated before the restricted mortgage interest, potentially affecting their overall tax position.

Additional employment income, investment income and other taxable receipts must also be considered.

Furthermore, the finance cost reduction cannot always be claimed in full during the same tax year.

Landlords should therefore calculate their total taxable income rather than assume that being a basic-rate taxpayer automatically means Section 24 has no effect.

This is particularly important where rental income increases, interest rates change or additional properties are acquired.

7. Can Limited Companies Claim Mortgage Interest?

Mortgage interest receives different tax treatment when a rental property is owned through a limited company.

Companies are not subject to the individual residential landlord Section 24 restriction.

Instead, qualifying mortgage interest is generally recognised under the Corporation Tax loan relationship rules.

This means the finance expense can usually reduce the company’s taxable profits, subject to applicable rules and restrictions.

Consider a property investment company receiving annual rental income of £24,000.

It incurs £4,000 of allowable property expenses and £12,000 mortgage interest.

Its simplified calculation would be:

Description	Amount
Rental income	£24,000
Allowable property expenses	(£4,000)
Qualifying mortgage interest	(£12,000)
Profit before Corporation Tax	£8,000

Unlike an individual residential landlord, the company generally obtains relief by recognising qualifying interest in arriving at its taxable profit.

However, mortgage capital repayments remain non-deductible.

Company ownership may provide advantages for some landlords, particularly those with substantial borrowing.

Nevertheless, transferring existing properties into a company can trigger Stamp Duty Land Tax, Capital Gains Tax and refinancing costs.

Corporation Tax and the tax consequences of extracting company profits must also be considered.

Incorporation should therefore be assessed as a complete financial decision rather than focusing exclusively on mortgage interest relief.

8. Interest-Only vs Repayment Mortgages: Which Is More Tax-Efficient?

Landlords frequently ask whether an interest-only mortgage offers better tax advantages than a repayment mortgage.

From a cash-flow perspective, interest-only mortgages usually require lower monthly payments because the outstanding capital is not being repaid.

This can leave more money available for maintenance, other expenses and future investments.

Repayment mortgages, meanwhile, gradually reduce the amount owed and increase the owner’s equity.

From a tax perspective, the relevant distinction is the amount of qualifying interest incurred, not the mortgage repayment method itself.

An interest-only mortgage may produce a larger qualifying interest amount over time because the outstanding principal generally remains unchanged.

However, paying more interest merely to obtain tax relief does not automatically make financial sense.

For example, spending an additional £1,000 in qualifying interest might produce only £200 of Income Tax relief for an individual residential landlord.

The landlord would still bear a net cost of £800.

Mortgage selection should therefore consider affordability, interest rates, repayment strategy, cash flow and long-term investment objectives.

Tax relief should be one consideration rather than the deciding factor.

9. Can Landlords Claim Mortgage Arrangement Fees?

Mortgage interest is not the only finance cost that may qualify for tax relief.

Certain fees associated with obtaining or repaying borrowing can also qualify, depending on their nature and purpose.

Examples may include mortgage arrangement fees, loan administration charges and qualifying refinancing costs.

For individual residential landlords, qualifying finance costs are generally subject to the same restriction as mortgage interest.

This means they may contribute to the basic-rate tax reduction rather than being deducted directly from rental profit.

However, not every fee connected with purchasing or refinancing property receives identical treatment.

Some expenditure may relate to acquiring the property itself, while other costs may need different accounting or tax treatment.

The distinction between capital and revenue expenditure is especially important.

Landlords should also consider whether finance fees must be spread over the relevant loan period rather than claimed entirely when paid.

HMRC explains the categories of allowable rental income expenses.

An accountant can help identify the appropriate treatment before a Self Assessment or Corporation Tax return is submitted.

10. Can You Claim Interest on a Remortgage?

Remortgaging a buy-to-let property does not automatically prevent mortgage interest relief.

However, whether the interest qualifies depends on the amount borrowed and the purpose of the borrowing.

For example, refinancing an existing qualifying buy-to-let mortgage may allow continued relief on the relevant interest.

Additional borrowing used for genuine property business purposes may also qualify.

This could include financing improvements, repairs or additional qualifying property investments.

Importantly, borrowing against a rental property does not automatically make all resulting interest eligible for relief.

HMRC generally considers how the borrowed funds are used and the capital introduced into the property business.

In some circumstances, landlords can withdraw capital previously introduced into their rental business while retaining qualifying interest relief, subject to relevant limits.

Additional borrowing beyond those limits may not qualify.

Landlords should retain refinancing documentation, property valuations and evidence explaining how additional funds were used.

HMRC provides practical rental income case studies, including examples involving increased mortgage borrowing.

Professional advice is particularly valuable before releasing equity for personal expenditure.

11. What Happens If Mortgage Interest Exceeds Rental Profit?

Some landlords experience years where their mortgage interest is greater than their taxable property profit.

This can occur when interest rates rise significantly or when a property experiences substantial maintenance expenses.

Under Section 24, the basic-rate reduction is limited.

Broadly, the calculation uses 20% of the lowest applicable figure among qualifying finance costs, property business profits and adjusted total income above the relevant Personal Allowance.

Consequently, landlords cannot always obtain relief for all qualifying interest immediately.

For example, suppose qualifying mortgage interest totals £15,000, while the relevant property profit is only £10,000.

Assuming the property profit is the limiting amount, the finance cost reduction is calculated on £10,000.

The remaining £5,000 of qualifying finance costs may be carried forward for potential relief in a later tax year.

These carried-forward amounts are subject to the same restrictions when used.

They do not automatically create a tax refund or reduce the rental profit figure.

Accurate records are essential to avoid losing track of unused finance costs.

12. What Other Property Expenses Can Landlords Claim?

Although mortgage capital repayments are not deductible, landlords may still claim various qualifying expenses incurred in managing their rental properties.

Common examples include:

• Letting agent and property management fees.
• Landlord buildings and contents insurance.
• Qualifying repairs and routine maintenance.
• Accountancy and certain professional fees.
• Ground rent and service charges.
• Council Tax and utilities paid by the landlord.
• Cleaning, gardening and property advertising.
• Qualifying replacement domestic items.

These expenses generally need to be incurred wholly and exclusively for the property rental business.

However, some costs are capital expenditure rather than everyday running expenses.

For example, substantial improvements may not qualify as immediate revenue deductions.

Such expenditure may instead be relevant when calculating a future Capital Gains Tax liability, depending on the circumstances.

Landlords should also distinguish between replacing an existing item and purchasing equipment or furnishings for the first time.

The rules surrounding improvements, repairs and domestic items can be complex.

Maintaining invoices and accurate expense categories will make tax return preparation easier and help support claims if HMRC raises questions.

13. Mortgage Interest on Commercial Properties

The Section 24 restriction primarily concerns residential property finance costs incurred by individuals.

Commercial properties receive different treatment.

For example, an individual landlord letting a qualifying commercial property may generally deduct eligible loan interest when calculating taxable property profits.

This is because the residential mortgage interest restriction does not extend to ordinary commercial property letting in the same manner.

However, the borrowed funds must still satisfy the relevant requirements for property business finance.

Mixed-use properties can create further complications.

Where a loan finances both residential and commercial property, the associated interest may need to be apportioned on a reasonable basis.

It would be incorrect to treat all interest as unrestricted simply because part of the property is used commercially.

Landlords owning shops with residential accommodation above them should pay particular attention to this distinction.

Accurate apportionment can help ensure eligible expenses receive the appropriate treatment without overstating tax relief.

14. What About Jointly Owned Rental Properties?

Where a rental property is jointly owned, each landlord’s share of income, expenses and qualifying mortgage interest must be considered.

For married couples and civil partners living together, the default Income Tax treatment is generally a 50:50 division of income from jointly held property.

Different beneficial ownership arrangements may permit an alternative allocation where the statutory requirements are satisfied.

Unmarried co-owners are generally taxed according to their actual entitlement to rental profits.

For Section 24 purposes, each individual’s qualifying finance costs and available tax reduction must be considered separately.

This can produce different tax outcomes where one owner pays basic-rate Income Tax and another pays higher-rate Income Tax.

However, changing the rental profit split must reflect the genuine legal and beneficial arrangements.

A landlord cannot simply allocate all the mortgage interest to whichever owner would obtain the greatest tax advantage without a valid basis.

Property ownership, mortgage obligations and tax reporting should be reviewed together before making changes.

15. Common Mortgage Tax Relief Mistakes Landlords Make

Incorrect mortgage reporting remains a common cause of errors in landlords’ tax returns.

One particularly frequent mistake involves recording the full monthly mortgage payment as an allowable expense.

Others include confusing mortgage interest with capital repayments, failing to apply Section 24, and incorrectly calculating carried-forward finance costs.

Some landlords also assume that interest on all remortgaging automatically qualifies, regardless of how additional borrowing is used.

Another mistake is relying entirely on bank statements when preparing rental accounts.

Bank statements normally show the total payment leaving the account, but they may not identify the precise interest and capital split.

Landlords should obtain lender statements or annual mortgage interest certificates.

They should also avoid assuming that limited company tax treatment is identical to personal property ownership.

Finally, landlords should remember that tax calculations and actual cash flow are different.

A property can appear profitable for tax purposes while generating very little spendable income after mortgage repayments.

Regular bookkeeping and annual tax planning can help prevent these issues.

16. How to Calculate Your Real Rental Profit

Landlords should monitor both taxable profit and actual cash flow to understand the performance of their investment.

Consider the following annual figures:

Description	Amount
Rental income	£20,000
Allowable operating expenses	(£3,000)
Mortgage interest	(£10,000)
Mortgage capital repayments	(£4,000)
Cash remaining before tax	£3,000

For an individual residential landlord, the taxable rental profit before finance cost relief would generally be £17,000.

The £10,000 of qualifying mortgage interest could potentially generate a £2,000 basic-rate tax reduction, subject to the applicable limits.

However, the actual cash remaining before tax is only £3,000.

If the landlord’s effective tax liability relating to that property exceeds £3,000, the property could produce negative cash flow after tax.

This illustrates why landlords should not rely exclusively on taxable profit when assessing investment performance.

A comprehensive property review should also consider mortgage rate changes, planned repairs, void periods, insurance increases and future refinancing requirements.

Maintaining a cash reserve can reduce the financial pressure caused by unexpected costs.

17. How Should Mortgage Payments Be Recorded in Bookkeeping?

Correct bookkeeping helps ensure mortgage costs receive the appropriate tax treatment.

For a repayment mortgage, the monthly payment should generally be separated into its capital and interest components.

The interest element should be recorded under the relevant mortgage interest or finance cost category.

The capital element reduces the outstanding mortgage liability on the balance sheet.

It should not be recorded as a normal operating expense.

For individual residential landlords, qualifying mortgage interest must also be separately identified for the Section 24 tax calculation.

Accounting software may record interest expenditure, but that does not necessarily mean the software automatically applies the correct Self Assessment restriction.

Landlords using FreeAgent, spreadsheets or other bookkeeping systems should ensure the correct treatment is reflected in their tax calculations.

Annual mortgage statements should be reconciled against the closing mortgage balance.

Where payments include fees, insurance products or other additional charges, those components may require separate classification.

This is particularly important when preparing accounts from bank transactions alone.

18. Can Landlords Reduce Their Tax Bills Legally?

Effective tax planning can help landlords understand and manage the impact of mortgage interest restrictions.

However, reducing tax should not involve claiming expenditure that does not qualify.

Landlords should first ensure all allowable property expenses are recorded correctly.

They should then review whether qualifying finance costs have been accurately calculated, including any amounts carried forward from previous tax years.

Joint ownership arrangements may also deserve consideration, particularly where owners have different income levels.

For landlords considering additional acquisitions, the choice between personal ownership and limited company ownership can have long-term tax implications.

Other planning opportunities might involve pension contributions, mortgage restructuring or reviewing the overall financing strategy.

However, each option should be assessed against the individual’s circumstances.

Transferring property into a limited company solely to obtain mortgage interest deductions can create substantial upfront taxes and transaction costs.

Similarly, restructuring ownership between spouses may involve legal and Stamp Duty Land Tax considerations.

A professional tax review can help identify whether the proposed savings justify the associated costs.

19. Frequently Asked Questions

Can I deduct my full mortgage payment from rental income?

No. Mortgage capital repayments are not deductible. Qualifying mortgage interest may receive tax relief, but the method depends on whether the residential property is held personally or through a limited company.

Can higher-rate taxpayers claim 40% mortgage interest relief?

Individual residential landlords generally receive a basic-rate reduction of 20% on qualifying finance costs, subject to limits, rather than relief at 40%.

Is mortgage interest tax relief available on an interest-only mortgage?

Yes, potentially. Qualifying interest on an interest-only mortgage is subject to the same relevant tax rules as interest on a repayment mortgage.

Can unused mortgage interest be carried forward?

Yes. Qualifying residential finance costs that cannot be used for the current year’s tax reduction may generally be carried forward for use against the same property business in later years, subject to restrictions.

Can I claim mortgage interest on my main residence?

Mortgage interest relating solely to your private residence is normally not deductible against rental income. Special circumstances may arise where part of a property is genuinely used in a qualifying rental business.

Is mortgage interest deductible for limited company landlords?

Qualifying interest can generally receive relief under the Corporation Tax loan relationship rules, subject to the relevant conditions.

20. Final Thoughts: Understand Your Mortgage Tax Relief

The distinction between mortgage payments vs mortgage interest is one of the most important concepts for UK landlords to understand.

Although the entire mortgage payment affects your monthly finances, the repayment of capital does not qualify as a deductible rental expense.

Mortgage interest may qualify for tax relief, but individual residential landlords are generally restricted to a basic-rate Income Tax reduction under Section 24.

Limited company landlords usually receive different treatment, with qualifying interest recognised under the Corporation Tax loan relationship rules.

Understanding these differences can help landlords avoid incorrect tax claims, calculate their rental profits more accurately and make better financial decisions.

At Taxes Done Right Ltd, we help UK landlords with property accounts, Self Assessment tax returns, mortgage interest calculations, limited company accounts and property tax planning.

Whether you own a single buy-to-let property or manage a growing portfolio, professional support can help ensure your tax position is calculated correctly.

Need help understanding your mortgage interest tax relief?

Visit Taxes Done Right Ltd to explore our landlord accounting and tax services.

Need help deciding what’s best for your situation?

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📧 Email: Tax@TaxesDoneRight.co.uk

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