Mortgage interest tax relief

The mortgage interest tax relief is a type of tax credit that some landlords can claim.

Before 2017, borrowing money through a buy-to-let mortgage was a major tax advantage. But that’s no longer the case. The mortgage interest tax relief is the new system in place.

What mortgage interest tax relief can landlords receive in 2022-23?

Before 2017, the interest for landlords’ mortgages was 100% deductible. Since most landlords have interest-only mortgages (where you pay only the interest each month and the price of the property at the end of the period), this meant that you could basically claim all of your mortgage repayments. This was a very big tax-efficiency opportunity.  

But now, things have changed. The government introduced a mortgage interest restriction with changes gradually rolled out between 2017 and 2020.

Now, landlords receive a tax credit, which works out as a much smaller relief than before. 

How does the tax credit work?

The tax credit is based on 20% of your mortgage interest payments. This applies to the lowest of:

• Mortgage interest
• Property profits
• Total income above the personal allowance

However, this tax credit doesn’t apply to landlords that are basic rate taxpayers. There’s no change for you as you were already getting 20% back from the mortgage interest! It only affects those who are in the higher rate taxpayer bracket.

You can use our rental income tax calculator to see how much mortgage interest tax relief you can get.

Here’s an example of the changes

Jeff receives £950 per month from his rental income, which totals up to £11,400 per year. He also makes regular mortgage interest payments of £600 per month on that property, which comes to £7,200 for the year.

Jeff will get a tax credit of £1,440 (£7,200 x 20%). If he’s a basic rate taxpayer, this means he’ll only pay £840 in interest, but if he’s a higher-rate taxpayer, he’ll pay £3,120 – double the amount he would have paid under the old system.