The Bank of England held the UK interest rate – for the fourth time in a row – at 3.75% on 18 June 2026. This may sound like a neutral move, but for landlords with mortgage debt, this actually extends a period of elevated borrowing costs.
Those borrowing costs can be particularly painful for landlords who own property in their personal names. Unlike companies, they cannot fully offset mortgage interest against taxable rental income because of Section 24 mortgage interest relief. This means that the true cost of borrowing is often much higher than the mortgage rate itself would suggest.
So, while the headlines focus on whether rates have risen or fallen, many leveraged landlords should be asking a different question. What is a 3.75% base rate actually costing me? This article answers that question and explains why the impact is often greater than expected.
Key Takeaways
- The Bank of England held the UK interest rate at 3.75% on 18 June 2026 in a 7–2 vote
- Two members of the Bank’s Monetary Policy Committee (MPC) voted to raise rates to 4%, so borrowing costs are at least as likely to rise as fall in the near term
- For higher rate landlords, a held interest rate is not neutral as Section 24 (ITTOIA 2005 s.272A) blocks full deduction of mortgage interest, instead capping relief at a 20% tax credit
- A higher rate landlord paying £15,000 in mortgage interest receives relief worth £3,000 under s.274A, not the £6,000 a 40% deduction would once have produced
- Holding property through a limited company sidesteps Section 24 entirely, because companies can deduct mortgage interest in full, but incorporation carries SDLT and CGT costs
Why A Held UK Interest Rate Still Hurts Landlords
A held UK interest rate still hurts landlords because borrowing costs remain high, while many cannot fully deduct mortgage interest from their taxable rental income. As long as rates remain elevated, leveraged landlords continue to pay significant financing costs that receive only limited tax relief.
The Bank of England's Monetary Policy Committee sets the base rate to control inflation. On 18 June 2026, it voted 7–2 to keep the rate at 3.75%. The two members that voted differently instead called for an increase to 4%.
Consumer prices rose 2.8% in the year to May 2026, above the Bank's 2% target, and policymakers expect inflationary pressures to persist later in the year. The decision to hold rates, therefore, reflects a cautious “wait and see” approach rather than the start of a sustained rate-cutting cycle.
For owner-occupiers, an interest rate hold means predictable repayments. For landlords borrowing in their personal names though, it means their largest expense remains elevated while tax relief remains restricted. That combination is what continues to squeeze landlords’ after-tax returns, even when rates are not rising.
Is Section 24 the Real Pain Point?
Yes. For many leveraged landlords, Section 24 is the real pain point because it turns higher interest rates into a larger after-tax cost. While rising rates increase mortgage payments, Section 24 restricts the tax relief available on those payments, leaving many landlords worse off than they would be under normal business tax rules.
Before 2017, landlords deducted mortgage interest from rental income before calculating tax, much like any other business expense. However, Section 24 of the Finance (No. 2) Act 2015 changed that position. The restriction was phased in between 2017 and 2020 and has applied in full since the 2020/21 tax year.
Under the Income Tax (Trading and Other Income) Act (ITTOIA) 2005 s.272A, finance costs on residential property loans are not deductible when calculating taxable rental profits. Instead, ITTOIA 2005 s.274A provides a tax reduction equal to 20% of the interest paid, regardless of whether the landlord pays tax at 20%, 40% or 45%. Companies are excluded from the restriction and can continue deducting interest in full.
The practical effect is twofold. Higher rate taxpayers receive less relief on their borrowing costs than they would have done previously, and taxable rental profits appear higher because mortgage interest is no longer deducted before tax is calculated. In some cases, that can push landlords into higher tax bands or increase exposure to other income-based tax charges.
Worked Example: What the Interest Rate Hold Costs Landlords
Meet Priya. She’s a marketing manager in Leeds on a £48,000 salary, just inside the basic rate band. A few years ago, she bought a two-bed terrace nearby as a Buy-to-Let, on an interest-only mortgage of £300,000. It rents for £2,000 a month, i.e., £24,000 a year, and she spends about £4,000 a year on letting agent fees, insurance and repairs. After her 2026 remortgage, she is paying around 5% interest, or £15,000 per year.
Looking purely at cash flow, Priya sees the property as making a modest profit:
- Rental Income = £24,000
- Running Costs = £4,000
- Mortgage Interest = £15,000
- Cash Profit = £5,000
That is also how the property would have been taxed before Section 24. Today, however, the calculation looks very different.
Header | Cash Reality | Tax Calculation |
|---|---|---|
Rental Income | £24,000 | £24,000 |
Running Costs | (£4,000) | (£4,000) |
Mortgage Interest | (£15,000) | Not Deductible |
Profit | £5,000 | £20,000 |
Although Priya has only £5,000 left after paying her mortgage interest, HMRC taxes her as if she made £20,000.
That £20,000 is added to her £48,000 salary. Because the higher rate threshold starts at £50,270 and once her personal allowance is used, she has only £2,270 of basic rate band remaining:
- £2,270 taxed at 20% = £454
- £17,730 taxed at 40% = £7,092
Total tax attributable to the rental profit before relief becomes £7,546. She then receives the Section 24 tax reduction:
- £15,000 mortgage interest × 20% = £3,000
- Net tax attributable to the property: £4,546
Under the pre-Section 24 rules, the £15,000 interest would have reduced her taxable rental profit to just £5,000. Using the same tax bands, the tax attributable to the property would have been approximately £1,546.
In other words, Priya's rent has not changed. Her mortgage has not changed. Her interest bill has not changed. Yet she pays around £3,000 more tax every year because mortgage interest no longer receives relief at her marginal tax rate.
This is why the Bank of England's decision to hold rates matters. The longer borrowing costs remain elevated, the larger the amount of interest caught by Section 24. A future rate cut would reduce both the interest bill and the tax distortion. A prolonged hold keeps both in place.
Does a Held Bank of England Interest Rate Affect My Tax Bill Directly?
No, the base rate is not a tax. But it sets the floor under your mortgage pricing, and your mortgage interest is the cost Section 24 refuses to relieve. So, a held rate indirectly fixes the size of your non-deductible cost.
The higher your borrowing, the more this matters. Heavily leveraged higher-rate portfolios can become loss-making after tax, even while showing a positive cash profit. With two MPC members now voting to raise rates, the risk for landlords is skewed towards that cost rising, not falling.
What Higher Rate Landlords Can Do About This
Higher rate landlords cannot restore full mortgage interest relief under the current rules. Section 24 applies to all individual residential landlords, and mortgage interest is no longer deductible against rental profits. As a result, there is no compliant way to reclassify interest or offset it in order to regain full relief.
The practical options, therefore, sit at the structural level.
- Model the True After-Tax Return - Many landlords assess performance based on cash profit, but tax is calculated on a much higher figure once mortgage interest is removed. A property showing £5,000 cash surplus can still generate a significantly larger taxable profit and tax bill. The first step is ensuring decisions are based on post-tax yield, not cash flow alone.
- Explore Incorporation Options - Holding property through a limited company allows mortgage interest to be deducted in full against rental profits, with profits taxed at Corporation Tax rates. For leveraged higher rate taxpayers, this can materially improve after-tax returns. However, moving existing properties into a company can trigger Stamp Duty Land Tax and Capital Gains Tax, so the overall position must be modelled carefully before any decision is made.
- Consider Joint Ownership Allocation - Where ownership is shared with a spouse or partner who pays a lower tax rate, the effective impact of Section 24 may be reduced by allocating income more efficiently. This depends on legal ownership, beneficial interest, and individual tax positions, so it must be structured correctly.
In all cases, the key is that Section 24 is a fixed constraint. The decision is not about avoiding it, but about structuring ownership so its impact is reduced as far as commercially and legally possible.
Conclusion
A held UK interest rate is often presented as neutral news, but for higher-rate landlords with mortgage debt, it is anything but. It locks borrowing costs at elevated levels while Section 24 continues to limit the tax relief available on that interest.
For landlords in this position, the practical next step is to quantify the impact of steady interest rates in their own portfolio. That means stress-testing current properties at today’s rates, comparing personal ownership against alternative structures, and assessing whether the current setup still delivers an acceptable after-tax return before the next refinancing or acquisition decision.
FAQs
The UK base interest rate is 3.75% (as of June 2026). This is set by the Bank of England’s Monetary Policy Committee and influences mortgage rates, savings rates, and wider borrowing costs across the economy.
The Bank of England typically reviews interest rates every six weeks. The next rate decision is expected on 30 July 2026.
A return to 3% mortgage rates is not expected in the near term. Even if the Bank of England cuts the base rate, mortgage pricing is also driven by swap rates, lender funding costs, and inflation expectations. These factors mean mortgage rates can remain higher than the base rate suggests, even in a cutting cycle.
A held rate matters because it locks borrowing costs at an elevated level. For landlords with mortgages, this means interest payments remain high even when rates are not rising. Under Section 24, many landlords also cannot fully deduct that interest against rental income, meaning the after-tax cost of borrowing stays high for longer.
UK interest rates have been kept relatively high to control inflation. After periods of elevated energy prices, supply shocks, and strong wage growth, the Bank of England has maintained restrictive rates to bring inflation back towards its 2% target.
Individual landlords cannot deduct mortgage interest from rental income. Instead, they receive a tax credit equal to 20% of eligible finance costs.
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
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