Mortgage Interest and Your Tax Bill: Why the Payment Is Not the Expense

Your monthly mortgage payment is not a tax-deductible expense. Part of it might be. Working out which part is where a lot of landlords quietly get their tax wrong.

It is an easy mistake, because the bank takes one number out of your account each month and it looks like a cost. Half of it is not a cost at all.

The split

A repayment mortgage payment does two different things at once.

• Interest - the price of borrowing. Money gone. This is the part with any claim to be an expense
• Capital - repaying the loan itself. This is you buying your own house back. It increases your equity. It is not an expense in any system

On the property used throughout this blog - 135,000 borrowed at 5.5% over 25 years - the monthly payment is 829.02. In the first month that breaks down as:

Deduct the whole 829.02 and you have overstated your costs by 210.27 in month one alone - roughly 2,500 across the first year, on one property.

And the split changes every month

This is the part that catches people who work it out once and reuse the figure.

Early in a mortgage, most of the payment is interest. Late in a mortgage, most of it is capital. The payment stays at 829.02 the whole time, but the deductible portion shrinks year after year.

So a landlord who calculated their interest in year one and copied it forward is claiming too much by year five - and the error grows.

The reliable source is your lender's annual statement, which shows interest charged for the year. Use that figure, not an estimate.

Then there is the bigger question: is interest deductible at all?

United Kingdom

Individual landlords cannot deduct mortgage interest from rental income. Since the Section 24 changes took full effect in 2020, you instead receive a basic-rate tax credit - currently 20% - against the interest.

For a basic-rate taxpayer the outcome is broadly similar to the old deduction. For a higher-rate taxpayer it is materially worse, because the rental income is taxed at the higher rate while the relief comes back at 20%.

It also means your taxable rental profit can be considerably larger than your actual cash profit - and in leveraged portfolios, a landlord can owe tax on a property that produced almost no cash. That is the single biggest reason some portfolios that look profitable are not.

Properties held in a limited company are treated differently, which is why that structure gets discussed so often. See Buying Through a Limited Company.

United States

Mortgage interest on a rental property generally remains a deductible expense on Schedule E, alongside your other operating costs.

Elsewhere

Varies. The question to ask your accountant is specific: is mortgage interest on a let property deductible against rental income, restricted to a credit, or disallowed?

Why this changes how you keep records

Whatever your jurisdiction, the practical requirement is identical: track interest separately from capital, per property, every year.

Not the total payment. Not an average. The interest figure, from the lender's statement, per property.

You need it for three separate purposes:

• Your tax return - as a deduction or as the basis for a credit
• Your real cash flow - where the whole payment matters, because the whole payment leaves your account
• A lender application - underwriters want interest separated, and it is one of the documents that marks out an organised landlord. See How to Finance Your Next Rental Property

Those three uses want the same data cut two different ways, which is exactly why keeping one figure is not enough.

Interest-only mortgages

Common in UK buy-to-let. The whole payment is interest, so the split question disappears - but the capital does not. You still owe the full loan at the end of the term, and something has to repay it. That is a plan, not an accounting question, and it belongs in your figures rather than in the back of your mind.

Frequently asked questions

Where do I find the interest figure?

Your lender's annual mortgage statement. Most issue one automatically; if not, request it. Do not reverse-engineer it from your bank statements.

Can I deduct mortgage arrangement fees?

Often yes, and sometimes they must be spread over the life of the product rather than claimed in one year. Worth asking your accountant specifically rather than assuming.

What about the fee for remortgaging?

Broker fees, valuation fees and product fees on a remortgage of an existing let property are usually allowable. Fees relating to the original purchase are generally capital. See Rental Property Expenses You Can Claim.

My property makes cash but shows a taxable profit I did not expect. Why?

In the UK, most likely Section 24 - your interest is not reducing taxable profit the way it reduces your bank balance. Worth a conversation with an accountant, because it changes what your portfolio is actually worth to you.

Keep the two numbers apart

The Rental Property Tracker has a Mortgage tab that separates interest from capital per property, and a Tax Summary that nets rent received against deductible costs with mortgage interest kept on its own line - precisely because of the complication above. $27 once, Excel and Google Sheets.

To see how much of your cash flow the full payment consumes, use the free Rental Yield & Cash Flow Calculator.

General information for landlords, not tax advice. The treatment of mortgage interest differs substantially between countries and changes over time - the UK restriction and the US position described here are simplified summaries, not a statement of your position. Confirm with a qualified accountant before filing.