In this review article we present basic principles of magnetically induced heat generation of magnetic nanoparticles for application in magnetic particle hyperthermia. After explanation of heating mechanisms, the role of particle-particle as well as particle-tissue interactions is discussed with respect to achievable heating power of the particles inside the tumour. On the basis of heat transfer theory at the micro-scale, the balance between generated and dissipated heat inside the tumour and the resulting damaging effects for biological tissue is examined. The heating behaviour as a function of tumour size is examined in combination with feasible field strength and frequency. Numerical calculations and experimental investigations are used to show the lower tumour size limit for tumour heating to therapeutically suitable temperatures. In summary, this article illuminates practical aspects, limitations, and the state of the art for the application of magnetic heating in magnetic particle hyperthermia as thermal treatment of small tumours.