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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.
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:
|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.
There are two types of interest rates:
This means that your monthly repayments are fixed over an agreed period of time. The average rate in 2023 is around 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.
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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