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What is Interest-only mortgage?
Last verified 31 October 2026
An interest-only mortgage is a loan where your monthly payments cover only the interest, so the amount you borrowed stays the same until you repay it. It is common for buy-to-let because it keeps monthly costs lower.
Why it matters to landlords
HMRC's guidance says only the interest part of a mortgage payment is deductible, not the full payment. With a repayment mortgage the capital repaid each month is not a cost, so only the interest share counts. With interest-only, the whole monthly payment is interest, so it is the full amount that counts as a finance cost.
For residential lets that cost is not deducted from rent. Instead, since 6 April 2020, you receive a tax reduction of the basic rate, currently 20%, of the lowest of your finance costs, your property profits and your adjusted total income above the Personal Allowance. Any unused reduction carries forward. Landlords on interest-only still need a plan for repaying the capital at the end of the term, which is a lending matter and has no tax relief of its own.
Example
Dan pays £900 a month interest-only, £10,800 a year, on a let flat. He cannot deduct it from rent. If his property profit and income above his allowance are both at least £10,800, he gets a tax reduction of 20% of £10,800, which is £2,160.