Landlord Finance Costs Jump 32% as Profits Fall. The Mortgage Is Dividing the Market

The average tax-paying landlord’s profit fell 11.2% in 2024/25 as finance costs rose 32%, according to Savills’ analysis of HMRC data. Yet just under 40% of private landlords have a mortgage. The pressure is unevenly distributed.

For an owner without borrowing, a well-let property may still provide a useful income after maintenance and management costs. For an owner with substantial debt, the same rent can leave a much smaller surplus. If several mortgage deals expire close together, that difference can become visible across an entire portfolio within months.

The practical question is what your properties will leave you after their next refinancing. That figure may matter more to your next decision than the rent advertised by the letting agent or the equity shown on a spreadsheet.

A £2m Portfolio Can Produce £75,000 — or £5,000 — Before Tax

Consider an illustrative portfolio worth £2m, generating £100,000 of annual rent. Assume £25,000 of annual operating expenditure, including an allowance for routine maintenance. That leaves £75,000 before financing and tax.

The debt-free owner retains that £75,000 at this stage of the calculation. An owner borrowing £1.4m, equivalent to 70% loan-to-value, has a different result. At an illustrative 3% interest-only rate, annual interest is £42,000, leaving £33,000. At 5%, interest becomes £70,000 and the remaining cash falls to £5,000.

The properties have not changed. Neither have the rent or the assumed running costs. The £28,000 reduction comes entirely from the financing. At 6%, the same portfolio would have an annual £9,000 shortfall before tax, fees and any expenditure beyond the assumed allowance.

These are cash-flow illustrations, not taxable-profit calculations or investment returns. They exclude capital repayments, tax, mortgage fees and exceptional works. Their purpose is to show why the borrowing position can transform the income a landlord actually has available.

Your Portfolio May Be Comfortable Today and Tight Next Spring

A landlord with staggered fixed rates can experience the squeeze gradually. One property refinances this autumn, another in February and two more in June. The portfolio’s current bank balance may look healthy because much of the debt still carries yesterday’s pricing.

That makes an expiry schedule more useful than a single average mortgage rate. It shows when each increase reaches the cash account and whether several changes coincide with a repair programme, a void or a tax payment.

On a £1m interest-only balance, each additional percentage point costs £10,000 a year before fees. If only £250,000 of that balance refinances initially, the immediate annualised increase is £2,500. The full effect arrives as the remaining loans change. A forecast should follow those dates rather than assume everything reprices at once.

It should also allow for the months when cash outgoings are unusually high. A portfolio generating a modest annual surplus can still face a difficult quarter if a boiler replacement, refurbishment invoice and mortgage fee arrive together.

Rental Cover and Spendable Cash Answer Different Questions

A landlord may calculate that a property leaves enough cash to retain. A lender may still decline the requested loan because the rent does not satisfy its underwriting test.

Interest coverage ratio, or ICR, compares rental income with the interest cost used in the lender’s assessment. That assessment may use a stress rate rather than the mortgage’s initial pay rate. Portfolio underwriting can also require a schedule of the wider holdings, alongside a business plan and cash-flow information, as Fleet Mortgages’ published process illustrates.

Take a separate hypothetical property producing £24,000 of annual rent, with £300,000 of debt. At an illustrative 5.5% assessment rate, interest is £16,500 and gross rental cover is approximately 145.5%. Whether that passes depends on the lender’s applicable criteria.

Now deduct £6,000 of operating expenditure. The property leaves £1,500 after that expenditure and the illustrative interest cost, before tax and other excluded items. A respectable-looking gross cover figure can therefore coexist with a thin cash surplus.

The reverse distinction matters too. A landlord may be willing to support a property from other income, but that does not mean the lender will accept the arrangement. Borrowing eligibility and the owner’s willingness to cover a shortfall need to be assessed separately.

A Lower Rate Can Help. The Fee Can Change the Answer.

When margins tighten, the lowest rate becomes especially appealing. But buy-to-let product fees can materially affect the comparison, particularly on larger balances.

Suppose two hypothetical two-year interest-only products are available for a £500,000 loan. One charges 5% with a £10,000 fee; the other charges 5.3% with a £2,000 fee. With the balance unchanged and fees paid separately, two years of interest plus the stated fee would total £60,000 for the first and £55,000 for the second.

The lower-rate product would cost £5,000 more on those assumptions. Actual comparisons must also account for incentives, other charges and any interest on fees added to the loan. Where rental stress tests differ, the amount available may differ as well.

Timing creates another trade-off. Leaving an existing fix early may trigger an early repayment charge. Waiting until expiry may avoid that charge, but the available products can change. Both routes need a cost comparison that uses the relevant dates.

Would Reducing the Debt Make a Meaningful Difference?

For some landlords, the useful comparison is between keeping the full balance and paying part of it down. Reducing an interest-only loan by £100,000 at an illustrative 5.5% saves £5,500 of annual interest before tax and charges.

That may restore a cash buffer or move the application into a different loan-to-value band. It also uses £100,000 that could otherwise fund repairs, cover voids or support another investment. The landlord needs to see both consequences.

Using every available pound to reduce borrowing can leave a portfolio exposed to an ordinary maintenance bill. Keeping all cash untouched can leave unnecessarily expensive debt in place. A review should compare several repayment amounts while preserving an agreed reserve.

Interest-only borrowing can also reduce monthly outgoings compared with capital repayment, where available and appropriate. It leaves the principal outstanding, so the eventual repayment route remains part of the decision. A smaller monthly payment alone does not establish that the structure is sustainable.

Your Accountant’s Profit Figure Needs a Cash-Flow Conversation

A tax return and a bank statement describe different aspects of the business. For individual residential landlords, HMRC’s finance cost rules generally provide relief through a basic-rate tax reduction rather than deducting those costs from taxable rental profit. Conditions and limits apply.

Consequently, cash remaining after interest cannot simply be labelled taxable profit. Ownership structure matters, and your accountant should calculate the actual tax position. Our illustrations deliberately stop before tax.

This creates a useful joint review. The accountant can explain the return and the after-tax result. Willow can assess the borrowing options, total mortgage costs and lender requirements. Together, that helps establish whether the pressure comes from weaker rental performance, higher operating expenditure, more expensive debt or several factors at once.

Moving property into a company should not be treated as a quick mortgage fix. Any proposed ownership change needs separate tax and legal advice, alongside a financing assessment. Transaction costs and existing loan conditions can materially affect the outcome.

Review the Next Twelve Months Before Buying the Next Property

Acquiring another rental can be attractive while an existing portfolio appears comfortable. The better starting point is its position after the next round of refinancing and planned works.

A new purchase uses cash for equity and transaction costs. It can also add another loan to a portfolio already approaching several expiries. Before committing, establish how much reserve remains if the existing debt becomes more expensive and one property loses rent temporarily.

That is the borrowing question behind Willow’s recent article on why existing portfolio debt is taking priority over new purchases. The next acquisition should be considered alongside the commitments already in place.

How Willow Private Finance Can Help

Willow can review the mortgages behind a portfolio and compare suitable product transfers and remortgages, including specialist options where the properties or ownership arrangements require them.

The starting point is a property schedule. From there, we can identify the loans approaching expiry, compare total borrowing costs and establish where rental cover or valuation may constrain the available options. Where appropriate, the review can also compare partial debt repayment and different repayment structures.

You should finish with a clearer view of what can be arranged, what it would cost and how much cash the portfolio would retain. For landlords whose income depends on those properties, that is the figure worth establishing before the next fixed rate ends.