This guide explores financing options for property investors, including buy-to-let mortgages and director’s loans. We discuss tax relief implications to help make informed, tax-efficient decisions. Remember, not just how much you borrow but how you structure it counts.
Personal borrowing routes
For most individual investors, the obvious path is taking out a dedicated mortgage on the rental property. Lenders assume you’ll fund the deposit personally (typically 25%+), so the mortgage covers the balance. Given the additional risks, interest rates tend to be higher than owner-occupier loans, but they can still look attractive in a rising market.
Alternatively, remortgaging your home to release equity provides another common funding source—especially where this secures more favorable interest rates. The good news is that tax relief applies to interest on loans up to the property value when first let, regardless of whether the debt is secured on that specific property or not.
Residential v Commercial lets
Here’s where things get more nuanced on the tax front. Depending on your property type, interest and finance cost deductibility varies:
Residential Lets:
• Interest costs are NOT deducted when calculating rental profits
• Instead, basic rate (20%) tax relief is given via a reduction in overall tax payable
• Unutilised interest costs roll forward to offset future tax bills
Furnished Holiday Lets / Commercial Lets:
• Full interest and finance costs deducted when calculating rental profit/loss
• Effectively gives relief at investor’s marginal tax rate
So, for higher rate taxpayers, holding qualifying ‘commercial ‘-style lets can significantly boost post-tax returns compared to vanilla buy-to-lets, assuming profitable rental operations.
Corporate borrowing structures
But what if you plan to hold investment properties via a dedicated company? Here, the borrowing options (and tax treatment) shift again:
Direct Company Borrowing:
• Company takes out loans/mortgages secured on properties
• All interest and finance costs are fully deductible against the company’s taxable profits
• Can improve post-tax position, assuming profitable rentals and Corporation Tax rates below income tax levels
Indirect director’s Loans:
• Individual director borrows funds personally (e.g. home equity release)
• Director then lends funds to the company to finance purchases
• Company pays director interest on loans, deducting at source
• Assuming a ‘close company’, the director gets tax relief on interest paid, offsetting tax due on amounts received
• HOWEVER – the company must rent out the properties, not simply hold passively, to qualify for relief
Debt isn’t always desirable
While leveraging property investments can multiply gains, it’s not an automatic panacea. Unfavorable interest rates, poor rental yields or falling prices can all rapidly erode equity. Worse still, you’re fully exposed until loans get repaid:
• Mortgage interest ranks ahead of profits – you’ll owe payments even if voids persist
• Falling prices can tip you into negative equity, trapping your initial deposit capital
• Excessive borrowing reduces future financial flexibility as loans constrain disposable income
So always stress-test your figures and retain a safety cushion. Lenders typically look for rental income that is at least 145% of finance costs—use this as a sensible baseline to avoid overstretching yourself.
Keeping records for relief
As with any tax matter, keeping detailed records is essential to support borrowing deductions. Ensure you can provide evidence:
• Purpose and utilisation of loans (investing in specific qualifying properties)
• All interest paid and accrued, split by property and tax year
Consult professional tax advisors to check your relief claims and avoid any inadvertent errors, especially regarding rolling loan interest between tax years.
In summary
Astute debt financing lies at the heart of successful property investment. You can maximise tax efficiency by aligning your borrowing approach with your chosen ownership structure and target investment types. In general:
• Basic rate taxpayers may favor simple personal BTL mortgages
• Higher/additional rate taxpayers benefit more from holding via qualifying low-tax companies
• Remortgaging can access better rates, but beware of over-leveraging
• Holiday/serviced accommodation brings preferential interest treatment
• Director’s loans can mitigate higher personal taxation – but check all conditions carefully
Above all, professional guidance remains key to charting your optimal loan arrangements while clarifying common borrowing pitfalls. With judicious financing in place, you’re well on the way to building a profitable, tax-efficient property portfolio.
