UK Landlord Mortgage Rate Impact on Profits 2026: What You Need to Know

The Section 24 Problem

Before April 2017, landlords could deduct their mortgage interest costs from rental income before calculating their tax bill. A landlord with £20,000 rental income and £12,000 mortgage interest paid tax only on £8,000 of profit.

Section 24 of the Finance Act 2015 phased this out progressively between 2017 and 2020. Since April 2020, landlords can no longer deduct mortgage interest at all. Instead, they receive a 20% basic rate tax credit on their mortgage interest costs.

This change is often underappreciated in its severity. For a basic rate taxpayer, the outcome is broadly the same. For a higher rate taxpayer, the impact is substantial and has been made considerably worse by the rise in mortgage rates since 2022.

How Section 24 Works in Practice

Example: The Section 24 Trap

A landlord with a buy-to-let property has:

• Annual rental income: £18,000
• Annual mortgage interest: £12,000
• Other allowable expenses: £2,000 (repairs, insurance, letting agent fees)

Under the old rules (pre-2017):

• Taxable profit = £18,000 - £12,000 mortgage - £2,000 expenses = £4,000
• Tax at 40% (higher rate taxpayer) = £1,600

Under Section 24 (current rules):

• Taxable profit = £18,000 - £2,000 expenses = £16,000 (mortgage interest not deductible)
• Tax at 40% on £16,000 = £6,400
• Less 20% basic rate credit on £12,000 mortgage interest = £2,400
• Net tax payable = £6,400 - £2,400 = £4,000

That is £4,000 of tax on a property that generated only £4,000 of genuine profit (income minus all actual costs). The landlord breaks even before tax but pays £4,000 to HMRC after it.

This is not a hypothetical edge case. With buy-to-let mortgage rates in the 4%-6% range in 2026, many properties that were bought when rates were 2%-3% now generate little or no profit after mortgage costs and expenses -- yet landlords still owe substantial tax bills because Section 24 taxes the gross rental income, not the net.

Why Mortgage Rate Rises Have Made Things Worse

Section 24 was introduced during an era of historic low interest rates. When a landlord's mortgage rate was 2%, the gap between gross rental income and mortgage interest costs was wide enough that even taxing on gross income was manageable.

At a mortgage rate of 5%, a £250,000 buy-to-let mortgage costs approximately £12,500 per year in interest. On a property renting for £16,000 per year, that leaves only £3,500 before other expenses -- but the landlord is taxed on £16,000 (minus non-mortgage expenses) at their marginal rate.

The combination of rising rates and Section 24 has pushed many leveraged higher-rate landlords from profit into loss after tax. This is a significant driver of landlords selling properties and exiting the market.

Buy-to-Let Mortgage Stress Tests

Lenders do not just look at current rental income against current mortgage costs. They apply stress tests to ensure the property stacks up even if rates rise.

The standard approach requires rental income to cover a minimum of 125%-145% of the mortgage payment, calculated at a stressed interest rate rather than the actual product rate. The stressed rate is often around 5.5%-7.5%, depending on the lender, even if the actual product rate is lower.

Example: You want to borrow £200,000. Stress test at 6% interest = £12,000/year. At a 125% coverage ratio, the lender requires minimum annual rent of £15,000 (£1,250/month). At 145%, the requirement rises to £17,400 (£1,450/month).

For higher rate taxpaying landlords, lenders often use the higher 145% stress test coverage ratio. This reflects the fact that Section 24 means their effective mortgage costs, in tax terms, are higher than those of a basic rate taxpayer.

Portfolio landlords (those with four or more mortgaged properties) face even more stringent assessment. Lenders assess the entire portfolio rather than just the individual property, looking at aggregate income, debt and the landlord's personal income and liabilities.

Strategies for Landlords Under Pressure

Review Your Mortgage

Many landlords who took fixed-rate mortgages at historically low rates in 2020-2022 are now refinancing onto much higher rates. When a 2-year fix at 2% ends and you refix at 5%, the additional £6,000-£9,000/year in interest can be the difference between profitable and loss-making.

Options to consider:

• Longer-term fixes (5 or 10 years) to lock in current rates if you believe rates will remain elevated
• Offset mortgages that reduce interest if you hold significant cash savings
• Product transfers with your existing lender (often quicker and with fewer arrangement fees than remortgaging to a new lender)

Maximise Allowable Deductions

While mortgage interest is restricted, many other expenses remain fully deductible. Make sure you are claiming:

• Letting agent fees and management charges
• Buildings and contents insurance
• Maintenance and repairs (not improvements)
• Accountancy fees
• Ground rent and service charges (leasehold properties)
• Landlord licensing fees
• Void period utility costs where you are responsible

A proper set of accounts through an accountant familiar with property tax can identify deductions that a self-managing landlord might miss.

The Incorporation Question

Companies deduct mortgage interest as a business expense in the normal way. Corporation tax rates are 19% (profits up to £50,000) and 25% (profits above £250,000), lower than the 40%-45% higher rate income tax many landlords pay.

This sounds attractive, but incorporation comes with serious costs:

• Stamp Duty Land Tax on transfer: When you transfer personally owned properties to a limited company, SDLT applies as if the company is buying at full market value -- including the 5% additional dwelling surcharge on top of standard rates. On a £350,000 property, this could be £27,500 or more
• Capital Gains Tax event: The transfer triggers a disposal for CGT purposes. If the property has increased in value since purchase, CGT is payable at 18%-24% on residential property gains
• Higher mortgage rates: Most buy-to-let mortgages for limited companies carry higher arrangement fees and interest rates than personal buy-to-let mortgages

For most existing landlords, the tax saving from incorporation rarely justifies the upfront SDLT and CGT cost unless they are building a large portfolio from scratch. For new property investors considering scale, incorporating from the start makes more sense.

Setting Rents to Market Level

With costs rising, some landlords operating below market rents may have been reluctant to increase them. However, Section 24 means that setting below-market rents directly costs you at the marginal tax rate -- every £100/month below market is £100 of gross income you are taxed on without the benefit of that income in hand.

Statutory processes govern rent increases for assured shorthold tenancies. If you are in a fixed term, you can only increase at the point of renewal. Periodic tenancies allow a formal Section 13 rent increase notice.

Filing Requirements for Landlords

Rental income must be declared through self-assessment. You must register for self-assessment if you have not already done so. Key points:

• Landlords with rental income above £2,500/year after allowable expenses must file a tax return
• The property income allowance (£1,000) allows tax-free rental income up to that threshold, but cannot be combined with expense deductions -- you use one or the other
• Making Tax Digital (MTD) for income tax is being phased in. From April 2026, self-employed people and landlords with combined income above £50,000 must use MTD-compatible software for quarterly reporting

Frequently Asked Questions

What is Section 24 in simple terms? Section 24 means landlords pay income tax on their gross rental income (minus non-mortgage expenses) rather than on profit after deducting mortgage interest. They receive a 20% credit on the interest, but higher rate and additional rate taxpayers still end up paying significantly more tax than before.

Does Section 24 apply to limited companies? No. Section 24 only applies to individual landlords and partnerships. Limited companies can still deduct mortgage interest as a business expense in full. This is one reason some landlords consider incorporation.

I am a basic rate taxpayer -- does Section 24 still affect me? For basic rate taxpayers, the 20% credit broadly compensates for the lost deduction, so the impact is usually neutral or minor. However, if your rental income pushes you into the higher rate band, the portion taxed at 40% is affected.

Can I deduct the cost of a remortgage? Mortgage arrangement fees and legal costs associated with financing a rental property are allowable as finance costs and attract the 20% tax credit, just like interest payments.

What is the 125% stress test? Lenders require rental income to be at least 125%-145% of the monthly mortgage payment, calculated at a higher notional interest rate (typically 5.5%-7.5%), not the actual rate on the mortgage. This ensures the property remains financeable even if rates rise further.

Can I use rental losses to offset other income? Rental property losses can only be carried forward against future rental profits from the same property business. You cannot offset rental losses against employment income or other sources.

What expenses are not deductible for landlords? Capital improvements (adding new features or substantially upgrading the property), initial furnishing costs for unfurnished properties, mortgage capital repayments and personal expenses. Repairs and maintenance (like-for-like replacements) are deductible; genuine improvements are not.

Does Section 24 apply to furnished holiday lets? Furnished Holiday Let (FHL) properties used to be treated as a trade, allowing full mortgage interest deduction. However, the FHL tax regime was abolished from April 2025. Properties that were FHLs now fall under the same Section 24 rules as standard buy-to-let.

If I transfer my property to my spouse, can we split the tax bill? Yes. Property held jointly is assessed on each owner's share of the income. Transferring a beneficial interest to a lower-rate taxpaying spouse can reduce the combined tax bill. HMRC Form 17 allows you to declare an unequal beneficial ownership split if the property is not held 50:50.

Is now a good time to buy a buy-to-let? That depends entirely on the specific property, location, purchase price, leverage and your personal tax position. The combination of Section 24, elevated mortgage rates and rising compliance costs means the arithmetic needs careful modelling before purchase. Run the numbers with current rates and your actual tax rate, not pre-2017 assumptions.