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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:
| 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.
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 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.
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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