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Mortgage interest

  • 2 min read

Mortgage interest is the interest charged on your loan that you use to buy a house or a flat. When you get a mortgage on a property, the monthly amount that you pay the bank includes the interest rate that you agreed to at the point of purchase.

It’s calculated as a percentage of the mortgage issued to you. 

How does mortgage interest work for landlords?

If you rent out a buy-to-let property and earn rental income, you used to be able to claim back a portion of your mortgage interest, and pay less tax. But from 6th April 2020, this was changed. You can now only claim a flat 20% tax credit.

Take a look at how this affects you in practice below:

2016 Today
Annual rental income £12,000 £12,000
Annual mortgage interest £3,600 £3,600
Claimable mortgage interest £3,600 £0 (but instead you get a 20% tax credit worth £720)
Taxable annual income £8,400 £12,000
Basic rate tax bill £1,680 £1,680
Higher rate tax bill £3,360 £4,080

Check out our rental income tax calculator if you want to get an estimate of the impact based on your earnings.

How do the rates work?

There are two types of interest rates:

  • Fixed term rates

This means that your monthly repayments are fixed over an agreed period of time. The average rate in 2024 is around 4-6% depending on the length of your term. The fixed term that you agree to these rates can be as little as 2 years or as long as 10! Quite a commitment. 

  • Variable rates

This means that the amount that you pay can fluctuate month-to-month. Here, the variation will either be based on a rate set by the Bank of England (aptly called the base rate) or it will be based on a variation set by the lender. 

If you ever need support when it comes to making payments, head to HMRC.

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