Recording Mortgage Interest and Property Finance Costs

If you have a mortgage on your rental property, you need to record the interest portion as an expense. The way these finance costs are treated for tax depends on whether your property is residential or non-residential.

This guide explains what counts as a property finance cost, how Section 24 affects residential landlords, and how to record mortgage payments correctly in Provestor.

What counts as property finance costs

Property finance costs include interest and fees related to borrowing money for your rental business.

You can include:

  • Mortgage interest on loans to buy or improve rental property
  • Interest on loans to buy furnishings for the property
  • Interest on overdrafts used for the rental business
  • Alternative finance payments (for example, Islamic finance arrangements)
  • Fees and incidental costs for getting or repaying mortgages and loans, such as arrangement fees, broker fees, valuation fees, and early repayment charges
  • Legal fees charged by the lender for setting up the mortgage

You cannot include:

  • Capital repayments on the mortgage (only the interest element qualifies)
  • Legal fees for purchasing the property itself (these are capital costs for Capital Gains Tax)
  • Insurance premiums (record these under a separate expense category)
  • Costs for finance used for non-property purposes

Important

Only claim the interest portion of your mortgage payments, not the capital repayment part. Provestor asks you to enter the capital amount separately to ensure this is calculated correctly.

How finance costs are treated for tax

The tax treatment of property finance costs depends on the type of property you let.

Residential property: Section 24 restriction

From 6 April 2020, finance costs for residential property no longer reduce your rental profit directly. Instead, HMRC gives you a basic rate (20%) tax reduction based on your finance costs.

What this means:

  • You still record the full amount of finance costs in Provestor
  • Provestor submits these to HMRC in your quarterly updates and final declaration
  • HMRC uses them to calculate a 20% tax credit, not a direct deduction from income
  • Higher-rate and additional-rate taxpayers typically pay more tax than they did before this restriction was introduced

Example:

You pay £10,000 in mortgage interest on a residential property. Under Section 24:

  • The £10,000 does not reduce your rental profit
  • You get a £2,000 tax reduction (20% of £10,000) applied to your final tax bill

If you're a higher-rate (40%) taxpayer, you only get 20% relief instead of 40%, which increases your overall tax bill.

Non-residential property: full deduction

If you let commercial property (shops, offices, industrial units), Section 24 doesn't apply. You can still deduct 100% of finance costs directly from rental income when calculating your taxable profit.

How Provestor handles this automatically

When you add a property in Provestor, you select the property type:

  • Residential or FHL property — Mortgage interest is recorded as residential finance costs on your tax return. HMRC applies the 20% tax credit.
  • Non-residential property — Mortgage interest is recorded as non-residential finance costs on your tax return. It reduces your rental profit directly.

Provestor automatically maps your finance costs to the correct place on your Making Tax Digital returns based on the property type you selected. You don't need to think about this when recording day-to-day transactions.

For more detail on how Section 24 affects your tax bill, see HMRC's guidance on changes to tax relief for residential landlords.

How to record mortgage payments in Provestor

Recording mortgage payments follows the same process as other expenses, with one additional field to separate interest from capital repayments.

Step-by-step

  1. In your business workspace, navigate to the account where the mortgage payment was made (usually your business bank account or cash account)
  2. Add the transaction (manually using Add cash out, or by uploading a bank statement)
  3. Enter the full mortgage payment amount (interest plus capital)
  4. Choose Mortgages and property finance costs as the category
  5. Link the expense to the relevant property
  6. In the Capital repayment field, enter the capital portion of your payment
  7. Save the transaction

Provestor automatically calculates the interest portion (total payment minus capital repayment) and records only that amount as an allowable expense.

The capital repayment field

When you select "Mortgages and property finance costs" as your category, Provestor shows an additional field:

Capital repayment — Enter the capital portion of your mortgage payment. For interest-only mortgages, this is usually zero. Only the interest portion is allowable as an expense.

Why this matters:

If you have a repayment mortgage and enter the full payment without specifying the capital portion, Provestor will treat the entire amount as interest — which overstates your allowable expenses and is incorrect. Always enter the capital repayment amount to ensure accuracy.

For detailed guidance on the full expense recording workflow, see Capturing expenses.

Common scenarios

Interest-only mortgage

If you have an interest-only mortgage, your monthly payment is entirely interest (no capital repayment).

How to record:

  • Enter the gross payment amount (interest only) as the transaction amount
  • Leave the capital repayment field at £0
  • The full amount is recorded as allowable interest

Example:

  • Monthly mortgage payment: £800 (all interest)
  • Capital repayment: £0
  • Allowable finance cost: £800

Repayment mortgage

If you have a repayment mortgage, each payment includes both interest and capital. You need to separate these.

How to record:

  • Enter the full payment amount (interest + capital) as the transaction amount
  • Enter the capital repayment in the capital repayment field
  • Provestor automatically calculates the interest portion

Example:

  • Monthly mortgage payment: £1,200 (total)
  • Capital repayment: £400
  • Allowable finance cost: £800 (£1,200 - £400)

Mortgage arrangement fees and other costs

When you take out or remortgage a property, you may pay upfront fees. These are allowable as finance costs — they're considered incidental costs of obtaining the mortgage.

How to record:

  • Add the fee as a separate transaction (not part of the monthly payment)
  • Choose Mortgages and property finance costs as the category
  • Leave capital repayment at £0 (the entire fee is allowable)
  • Link to the relevant property

Examples of allowable fees:

  • Arrangement fees or product fees
  • Broker fees
  • Valuation fees required to get the mortgage
  • Early repayment charges

Loans used for multiple purposes

If you take out a loan that's partly for your rental business and partly for something else (for example, a mixed residential and commercial property, or a loan used partly for self-employment), you must apportion the interest.

How to record:

  • Calculate the business portion of the interest using a reasonable method (for example, based on loan amounts or property value)
  • Record only the business portion in Provestor

See Personal use and mixed expenses for guidance on apportioning costs.

Working with annual mortgage statements

One common challenge: mortgage lenders typically provide an annual statement showing how much interest and capital you paid over the year, but you need to record expenses monthly or quarterly.

The problem

For repayment mortgages, the split between interest and capital changes each month as you pay down the loan. Without a monthly breakdown, it can be difficult to know the exact capital amount for each payment.

How to handle this

The standard approach is to use an estimated split throughout the year, then reconcile to the actual figures when you receive your annual statement.

Record estimated amounts:

  • Look at your last annual mortgage statement or mortgage illustration
  • Divide the total annual capital repayment by 12 (or the number of payments made)
  • Use this approximate amount each month when recording mortgage transactions in Provestor

When you get your annual statement:

You have two options for correcting any difference between your estimated and actual interest:

Option 1: Edit your transactions in Provestor

Go back and correct the capital repayment amounts to reflect the true figures from your annual statement. This only works if you can still submit a quarterly update that includes the corrected figures.

For timing rules and when you can no longer correct via quarterly updates, see Amendments and corrections.

Option 2: Apply an adjustment at year-end

Calculate the difference between what you recorded and the actual interest paid, then apply the adjustment when you complete your final declaration. You don't create an adjustment transaction in your record keeping — the adjustment is made during the final declaration process.

Why approximations are acceptable

HMRC's main concern is that your final year-end figures are accurate. Minor differences in individual monthly recordings don't usually matter as long as the total for the year is correct.

Using a reasonable approximation for monthly capital repayments is widely accepted, provided you reconcile to the actual figures when you get the annual statement.

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