Soft magnetic ferromagnetic/insulator composites are complex objects in terms of structure and magnetic properties. They depend on many different parameters, among which one of the main ones is the amount of insulator. In this work, the effect of MgO content on magnetization processes in Fe/MgO composites is studied in detail by using a wide combination of properties and structure analysis methods. Several series of samples with content steps up to 0.1 wt % were prepared using standard powder metallurgy operations such as dry mixing, cold pressing, and sintering. The study demonstrates that the evolution of Barkhausen noise with increasing MgO content is not systematic. The second phase acts as an effective barrier to magnetic interaction between neighboring Fe particles only after reaching a certain point, which was found to be about 0.9% wt. Some other properties (coercivity, permeability, elastic properties) also demonstrate nontrivial composition dependence. To reveal the causes of the observed phenomena, the structure of the composites was studied in detail, and it was shown that with an increase in the MgO content in the range of 0.8−1%, a change in the mechanisms of structure formation occurs, which, in turn, affects the properties. The presented results provide insights into developing advanced soft magnetic composites with an optimal combination of a ferromagnetic powder and an insulator.