Elevated mortgage rates can hit a property owner twice. First, through continued payments of higher mortgage interest, and second, through a tax bill that does not account for that interest paid.
That is why the Bank of England interest rate decision of 17 September 2026, i.e., the decision to hold interest rates at 3.75%, matters so much. Property owners were hoping for lower rates to bring down mortgage costs. Instead, borrowing costs remain elevated, while the tax treatment of mortgage interest remains unchanged. For mortgaged landlords, this means that the squeeze continues on both sides - higher financing costs and limited tax relief on those costs. This squeeze is what this article looks at.
Key Takeaways
- The Bank of England has held its interest rate at 3.75% while signalling that interest rates could rise in the future if energy prices stay high
- The next Bank of England interest rate decision is due on 5 November 2026
- Property owners who let property in their own name can feel the impact of higher interest rates twice – first through higher mortgage payments and then through the tax treatment of that mortgage interest
- Section 24 prevents individual landlords from deducting residential mortgage interest from their rental income; instead, they receive a basic rate tax credit on the interest
- Companies are not subject to this restriction, allowing them to claim interest as a deductible expense under the Corporation Tax rules
- That is why the question of whether to hold property personally or through a company is important for landlords
What Happened With the Bank of England Interest Rate?
The Bank of England (BoE) held its base rate at 3.75% for the sixth consecutive time. But the decision to do that was not unanimous.
Six of the nine members of the BoE’s Monetary Policy Committee voted to keep rates unchanged, while three, including the Bank's Chief Economist, voted to raise the rate to 4%.
The reason for that split is inflation. It reached 3.1% in August, and the Bank expects it to cross 4% by the start of the next year. With inflation moving further away from the BoE's 2% target, some members judged that another rate rise was needed.
So, borrowers should not expect lower interest rates to bring down their mortgage costs in the near term. That matters particularly if your fixed-rate mortgage is coming to an end. The average two-year fixed mortgage rate has risen to 5.77%, while the average five-year fix stands at 5.83%, according to figures reported by the BBC. Buy-to-let mortgage rates are higher still. So, landlords refinancing their mortgages may face a substantial increase in their monthly interest costs.
But for landlords, the mortgage payment is only part of the calculation. The interest they pay can also affect how much of that cost is recognised for tax purposes. That is where Section 24 becomes important.
How Does This Rate Hold Hit Landlords Twice?
The Bank Rate hold keeps borrowing costs elevated for landlords, while Section 24 means individual landlords cannot deduct mortgage interest from their rental income when calculating taxable profit. The result is a double squeeze. Landlords continue paying high mortgage interest while receiving only a 20% tax credit on those finance costs.
Since April 2020, individual landlords have received this tax credit instead of being able to completely deduct mortgage interest from rental profits. The rules, commonly known as Section 24, were introduced by the Finance (No. 2) Act 2015 and fully phased in for the 2020/21 tax year. HMRC's Property Income Manual PIM2058 confirms that the mortgage interest deduction was completely replaced by the tax credit.
For a basic rate taxpayer, the 20% credit can broadly offset the tax effect of their mortgage costs. But for a higher rate taxpayer, it does not. If £1 of mortgage interest is incurred, a landlord paying Income Tax at 40% does not deduct that £1 from taxable rental income. Instead, the tax reduction is capped at 20p.
So, an interest rate hold can keep the landlord’s mortgage costs high without providing the full tax relief that would have been available under the old system. The landlord bears the higher financing cost in cash while Section 24 limits the corresponding tax reduction.
Worked Example: What This Double Hit Looks Like
Consider a landlord who earns £60,000 from their job and receives £15,000 a year in rent from a flat. The flat has an interest-only mortgage, with £9,900 a year going towards mortgage interest.
That £9,900 is a significant part of the property's rental income. But how it affects the landlord's tax depends on whether the flat is owned personally or through a limited company.
Header | Owned Personally | Owned Through a Company |
|---|---|---|
Annual Rental Income | £15,000 | £15,000 |
Mortgage Interest | £9,900 | £9,900 |
Can Mortgage Interest Be Deducted Before Tax? | No | Yes |
Amount Remaining After Mortgage Interest for Tax Purposes | £15,000 | £5,100 |
Tax at 40% | £6,000 | (Corporation Tax Applicable at 19% = £969) |
Section 24 Tax Credit | £1,980 | - |
Illustrative Tax Attributable to the Rental Income | £4,020 | £9,69 |
The difference is significant because the £9,900 mortgage interest is a real cost in both cases. The landlord personally still has to find £9,900 to pay the lender, but that £9,900 does not reduce their taxable rental income. Instead, they receive a £1,980 24 tax credit.
The company gets different treatment. Its £9,900 interest expense reduces the £15,000 rental income to £5,100 of taxable profit before Corporation Tax. At 19%, that leaves £969 of Corporation Tax.
In other words, a landlord can use most of their rental income to pay the mortgage and still be taxed on that income because the mortgage interest is not deducted from the rent.
Conclusion: Does All This Mean You Should Move Your Property Into a Company?
Not necessarily. Company ownership is becoming increasingly common, with Hamptons estimating that there were around 469,000 Buy-to-Let companies across Great Britain by the end of August 2026. But the fact that more landlords are using companies does not mean incorporation will save you money. Whether it works for you depends on your rental income, mortgage interest, tax position and plans for the property.
That is where our Individual vs Corporate Tax calculator can help. Enter your income, expenses and mortgage interest to compare the tax position under personal and company ownership. In a couple of seconds, you can see the difference in taxes and decide whether incorporation is worth it.
FAQs
The Bank of England's interest rate is currently 3.75%. The Monetary Policy Committee voted to hold it at 3.75% at its September 2026 meeting, although three of the nine MPC members voted for an increase to 4%.
The next Bank of England interest rate decision is due on 5 November 2026. The MPC reviews Bank Rate roughly every six weeks.
There is no single right answer. A two-year fix gives you an earlier opportunity to refinance, while a five-year fix provides longer certainty. The answer depends on the rate offered, your loan balance, early repayment charges, how long you expect to hold the property and how much interest rate risk you are willing to accept.
No one can know for certain. But BoE has signalled that interest rates could rise if energy prices stay high.
A rate rise can put more financial pressure on an individual landlord because the landlord has to pay the higher mortgage interest while also paying tax on rental income that is not reduced by that interest. A non-landlord homeowner who lives in their own property does not have rental income to tax, so they simply face the higher mortgage payment.
Want more news from UKPA?
- Could the Autumn Budget 2026 Bring Down the UK Mansion Tax Threshold to £1.5m? - 25 September 2026
- The Bank of England Interest Rate Stays at 3.75%. But Here’s the Catch - 18 September 2026
- The North Is Now the Fastest UK Rent Growth Region. Here’s What That Does to Rental Yields - 17 September 2026
