Section 24 and Interest-Only BTL Mortgages: What It Costs and How to Plan

Landlords with interest-only buy-to-let mortgages often ask whether Section 24 treats them more harshly than landlords on repayment terms. The rule is identical for both: every pound of residential mortgage interest is restricted to a basic-rate tax credit rather than deducted from your profit. The real difference is arithmetic. An interest-only loan is all interest and never reduces, so the amount Section 24 restricts stays at its maximum for the whole term. A repayment mortgage pays the balance down, so its interest, and therefore the Section 24 hit, shrinks year by year.

That distinction matters more than the headline rate. Below we work the numbers for a higher-rate landlord, show where interest-only still earns its place, and set out the planning routes that genuinely move the needle. Switching mortgage type, on its own, is not one of them.

How Section 24 applies to mortgage interest

Section 24 of the Finance (No. 2) Act 2015 phased out the deduction of residential finance costs from rental profit and replaced it with a basic-rate tax reducer. The restriction has been fully in force since the 2020/21 tax year. For residential buy-to-let, you no longer subtract mortgage interest before calculating taxable profit. Instead you add it back, pay income tax on the higher profit, then claim a tax credit.

For 2026/27 that credit is 20% of the lowest of three figures:

• your total finance costs for the year (mortgage interest plus incidental costs of obtaining the loan)
• your property business profits for the year
• your adjusted total income above your personal allowance

In a normal trading year the finance-cost figure is usually the lowest, so the credit is simply 20% of your interest. The profits and income caps matter in loss-making or low-income years: where they restrict the credit, the unused finance costs carry forward to future years. Our step-by-step Section 24 tax credit guide works each cap in detail.

The restriction applies to all residential finance costs regardless of mortgage type:

• interest-only buy-to-let mortgages
• repayment (capital and interest) mortgages
• offset mortgages
• additional borrowing secured against let residential property

Companies are outside Section 24 entirely (they deduct interest in full), and commercial property is not caught. The furnished holiday lettings regime, which used to allow full finance-cost relief, was abolished from 6 April 2025, so former holiday lets now sit inside the ordinary property business and their interest is restricted like any other residential let.

Why interest-only feels worse (and why it is not, in relief terms)

The relief rate is the same for both mortgage types. What differs is how much interest you pay, and therefore how much money the restriction touches.

On a repayment mortgage, every monthly payment chips away at the capital. As the balance falls, the interest portion falls with it, so the figure caught by Section 24 declines steadily across the term. On an interest-only mortgage the balance never moves, so the interest stays at its full level year after year. You are exposed to the maximum Section 24 restriction for the entire life of the loan, and you still owe the whole capital at the end.

This is why the right framing is not "does Section 24 punish interest-only", but "an interest-only mortgage keeps the Section 24 restriction permanently at its ceiling". The rule is neutral; the loan structure is what sustains the exposure.

Worked example: higher-rate landlord, interest-only vs repayment

Take a higher-rate landlord with a single buy-to-let property let at GBP18,000 a year, GBP2,000 of allowable non-finance costs, and a GBP200,000 mortgage at 5%. We compare interest-only against a repayment mortgage in its first year, on 2026/27 figures.

Step	Interest-only (5%)	Repayment (5%, year 1)
Annual mortgage interest	GBP10,000	GBP9,906 (interest element)
Rental income	GBP18,000	GBP18,000
Less non-finance costs	(GBP2,000)	(GBP2,000)
Taxable rental profit (interest not deducted)	GBP16,000	GBP16,000
Income tax at 40%	GBP6,400	GBP6,400
Section 24 credit (20% of interest)	(GBP2,000)	(GBP1,981)
Net tax on the let	GBP4,400	GBP4,419

The GBP6,400 income-tax line is the marginal tax attributable to the let (the GBP16,000 of rental profit taxed at 40% on top of the landlord's other income), not the landlord's whole income-tax bill, which is the standard way these examples are set out. In year one the tax bills are almost identical, because the interest figures are close. The picture diverges over time. On the repayment mortgage the balance falls, the interest element shrinks each year, and so does the Section 24 restriction, so the net tax slowly improves. On the interest-only mortgage the GBP10,000 interest and the GBP2,000 credit repeat every year, unchanged, for the full term.

The point the table makes clear: Section 24 does not single out interest-only mortgages. The two structures start in roughly the same tax position. What separates them is the trajectory, and that is a debt-reduction question, not a tax-relief one.

The cash-flow trade-off

Where interest-only pulls ahead is monthly cash. Using the same GBP200,000 loan at 5%, the contrast is stark before any tax:

Monthly figures	Interest-only	Repayment (25-year term)
Rent received	GBP1,500	GBP1,500
Mortgage payment	GBP833	GBP1,169
Surplus before other costs and tax	GBP667	GBP331

The interest-only borrower keeps roughly twice the monthly surplus, which is the whole appeal: capital is preserved for the next deposit, and cash flow stays liquid. The catch is that the higher interest is exactly what Section 24 restricts, so a chunk of that surplus is handed back at the self-assessment deadline. And the capital still has to be repaid or refinanced at the end of the term. Treat the monthly surplus as before-tax, and budget for the January tax bill the interest-only structure creates.

Where interest-only still makes sense under Section 24

Section 24 has not killed the interest-only case. It has narrowed it. The structure still works well when:

• You are a basic-rate taxpayer. Section 24 only bites where relief would otherwise exceed basic rate. A landlord firmly within the basic-rate band gets a 20% credit that matches the rate they would have relieved the interest at anyway, so there is no extra cost. The watch-point is that adding all the interest back to taxable profit can tip you into higher rate, and interest-only's larger interest figure makes that more likely. Our note on Section 24 and basic-rate taxpayers covers the threshold trap.
• Capital growth is the strategy. If the plan is appreciation rather than income, preserving capital and accepting the annual Section 24 cost can still beat tying cash up in capital repayments.
• You are building a portfolio. The freed-up cash flow funds the next deposit. This is where most landlords historically used interest-only, and where the trade-off against the tax cost is sharpest.
• The property is held in a company. Inside a limited company, interest is fully deductible and Section 24 does not apply, so interest-only is meaningfully more efficient.

Planning routes that actually reduce the Section 24 cost

Because the restriction is the same for both mortgage types, the real planning happens elsewhere. The honest options are these.

Incorporation

A limited company deducts mortgage interest in full against rental profit before corporation tax, so Section 24 does not apply. On an interest-only mortgage, where the restricted interest is largest, the saving from incorporation is correspondingly larger. But incorporation is not a free switch: transferring property in can trigger capital gains tax and stamp duty land tax, lending is on company terms, and you are then taxed again when you extract profit as salary or dividends. It suits sizeable, growing, higher-rate portfolios more than a single property. Compare the two routes head-on with our Section 24 versus incorporation guide and the buy-to-let limited company guide.

Pension contributions

For a higher-rate landlord pushed over the threshold by Section 24, a personal pension contribution extends the basic-rate band, which can pull rental profit back out of higher rate and recover relief that Section 24 would otherwise deny. It is one of the few levers that directly counteracts the band-creep an interest-only mortgage's large add-back causes. See Section 24 and pension contributions for the mechanics and the annual allowance limits.

Ownership splitting between spouses

Where one partner is a basic-rate taxpayer, shifting a share of the property (and its income) to them can move profit, and the associated finance costs, into a band where Section 24 does not bite. This is a genuine structural lever, not a paper exercise, and it follows beneficial ownership rather than a convenient split.

Offset mortgages

An offset reduces the interest you actually pay by setting savings against the balance, which lowers the figure Section 24 restricts. It does not change the rule, it changes the input. The benefit is real but narrow: your offset savings earn nothing, and offset products carry a rate premium. It suits landlords holding cash who value flexibility over a structural fix.

Remortgaging and additional borrowing

Increasing borrowing raises your interest and therefore your Section 24 restriction, so refinancing decisions should be modelled with the tax cost included, not just the headline rate. We cover the detail in Section 24 and remortgaging your BTL property.

The 2027 changes and what they mean for interest-only landlords

From 6 April 2027, property income in England, Wales and Northern Ireland is taxed at its own rates of 22% basic, 42% higher and 47% additional. Scotland is the only nation carved out for 2027/28. These rates were enacted in Finance Act 2026 (Schedule 1), so they are settled law, not a proposal.

The part that matters for Section 24 is often misunderstood. The finance-cost reducer rises in step to 22%. It is not frozen at 20%. The effect is:

Landlord type	Property rate from 2027/28	Section 24 reducer	Effect
Basic rate	22%	22%	Reducer matches the rate, so no new wedge opens
Higher rate	42%	22%	Wedge of 20pp, the same as the current 40% vs 20% gap
Additional rate	47%	22%	Wedge of 25pp, the same as the current 45% vs 20% gap

For a basic-rate landlord nothing worsens: the 22% reducer tracks the 22% rate exactly. For higher and additional-rate landlords the reducer improves by two points, but their underlying rate rises too, so the structural restriction is unchanged in size. Because an interest-only mortgage carries the most interest, this is the structure where the two-point improvement, and the higher rate it sits behind, moves the most money. Our guide to the 2027 property income tax rates sets out the full picture, and our note on whether Section 24 will be reversed explains why none of this signals a repeal.

Making Tax Digital and record keeping

Making Tax Digital for Income Tax is live and phased by qualifying income: GBP50,000 from 6 April 2026, GBP30,000 from 6 April 2027, and GBP20,000 from 6 April 2028. Once you are in, you keep digital records, file quarterly updates, and submit a final declaration after the tax year.

For Section 24 the critical record-keeping point is that mortgage interest must be tracked separately as a finance cost, not blended with repairs, insurance or agent fees, because it is restricted rather than deducted. Interest-only mortgages are slightly simpler here: the whole payment is interest, so there is no capital element to strip out of each statement. Repayment landlords must separate the interest from the capital every period. Our Making Tax Digital for landlords guide walks the timeline and the digital-records floor.

Capital gains on the eventual sale

Whatever mortgage you choose, capital gains tax on a residential disposal is unaffected by Section 24. Mortgage interest, and indeed the capital you repay on a repayment loan, is irrelevant to the CGT computation: you are taxed on the gain (proceeds less original cost and qualifying improvements), not on the equity. For 2026/27 residential gains are taxed at 18% within the basic-rate band and 24% above it, after the GBP3,000 annual exempt amount.

The interest-only borrower's preserved capital does not increase the gain; the repayment borrower's paid-down balance does not reduce it. The difference between the structures shows up purely in how much cash you walk away with after redeeming the loan, not in the tax on the gain itself.

Getting the structure right

The interest-only versus repayment decision is, at heart, a debt and cash-flow decision, with Section 24 sitting on top of both. The relief rule is identical, so changing mortgage type does not change your Section 24 position. What changes your position is where the property is held, how the income is split, whether pension contributions reclaim band space, and whether your interest figure can be reduced.

A specialist property accountant can model the interest-only and repayment paths against your actual income, test whether incorporation or ownership splitting pays for itself, and make sure your records are MTD-ready before the relevant threshold catches you. The right answer depends on your tax band, your portfolio size, and whether you are chasing income or growth, not on a rule that treats both mortgages the same.