Tax Glossary

Mortgage Interest

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Last updated on:
March 17, 2024

Mortgage interest is essentially the cost you incur for borrowing funds to purchase real estate, such as a home or a flat. This interest forms part of your monthly mortgage payments to the bank, calculated as a percentage of the total loan amount you've taken out.

Impact on Landlords

For landlords who generate income through renting out properties, the approach to claiming mortgage interest has evolved. Previously, landlords could deduct a portion of their mortgage interest from their taxable rental income. However, since April 6, 2020, this has been replaced by a flat 20% tax relief on mortgage interest.

Here’s a brief comparison to illustrate the change:

  • Before 2020: Landlords could deduct their entire mortgage interest from rental income before calculating tax.
  • After 2020: Instead of a deduction, landlords receive a 20% tax credit on their mortgage interest costs.

This adjustment affects landlords by increasing the taxable portion of rental income, potentially leading to higher tax liabilities, especially for higher-rate taxpayers.

Mortgage Interest Rates Explained

Mortgage interest rates come in two main types:

  • Fixed Term Rates: These lock in your monthly payments for a set period, offering stability regardless of market fluctuations. In 2023, the average rate hovers around 6%, with terms ranging from two to ten years.
  • Variable Rates: Under this arrangement, your monthly payment amounts can change. Variable rates may track the Bank of England's base rate or be defined by the lender’s own criteria.

Navigating Payment Challenges

If you're facing difficulties in keeping up with mortgage payments, it's crucial to seek guidance. The HMRC website provides resources and support for individuals struggling with payment obligations, offering a starting point for finding assistance.

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