Should you choose a repayment or interest-only Buy to Let mortgage?
'Repayment' and 'interest-only' are the two different ways of repaying mortgages - that's mortgages of any kind, not just Buy to Let. Which one suits you best depends on your financial situation.
Here, we explain how repayment and interest-only Buy to Let mortgages work, along with the pros and cons of each, to help you decide which might be right for you.
What is an interest-only mortgage?
There are two separate elements to a mortgage, both of which you have to repay. One is the capital sum you borrow; the other is the interest that the lender charges on the loan.
With an interest-only mortgage, each month you pay only the interest owed and none of the capital you've borrowed. This makes your monthly payments far less than if you were repaying capital at the same time.
When the mortgage term comes to an end, you’ll then to repay the capital balance as a lump sum.
You are well-advised to put money aside for this in a savings or investment account, though often Buy to Let landlords sell the property (hopefully at a profit) to pay off the mortgage.
● Your monthly payments are lower
The advantages of an interest-only Buy to Let mortgage
● You might be able to sell the property for more than you paid and take a profit enough to repay the Buy to Let mortgage and have money left over
● This could free up money to spend on buying or improving other Buy to Let properties in your portfolio
● Lower monthly payments can provide a safety net for times when you might have no rent coming in from this or other properties
● When the mortgage ends, you still owe 100% of the money you borrowed
The disadvantages of an interest-only Buy to Let mortgage
● You're relying on the property to at least maintain its value, though preferably to increase in value
● If you have to sell the house for less than you paid, you’ll have to make up the difference when you repay the debt
● You pay more in interest over the term of the mortgage because you haven't been paying off capital to reduce the amount you owe
If you would like more information on the benefits and drawbacks of interest-only mortgages, take a look at our guide to buy to let interest-only mortgages.
Are all Buy to Let mortgages interest only?Typically landlords choose interest-only Buy to Let mortgages to finance their investments because the monthly outgoings are less, and are usually covered by the rental income. You can, however, choose a repayment Buy to Let mortgage if you prefer.
What is a repayment mortgage?
With repayment mortgages, you repay some of the capital you've borrowed every month in addition to paying back some of the interest you owe.
Although your monthly payments will be higher with a repayment mortgage than with interest-only, at the end of the term, your mortgage will be paid off in full and you’ll own the property outright.
The advantages of repayment Buy to Let mortgages
● You don't have to worry about repaying a large lump sum at the end of the mortgage term
● You'll be paying off the amount you owe and at the end of the term will own the property outright.
The disadvantages of repayment Buy to Let mortgages
● You’ll have to pay out more each month because you're repaying capital and interest at the same time
Can you switch from interest-only to repayment or vice versa?
It is possible to switch from an interest-only to repayment mortgage and vice versa, although you will need to check with your lender to see if they will allow you to do this. If they won’t, then when your current deal finishes, you may be able to remortgage to a different Buy to Let deal which is arranged either on a repayment or interest-only basis.
Bear in mind that if you are switching from a repayment to an interest-only mortgage, your monthly payments will be lower, but you’ll still owe all the capital you’ve borrowed at the end of the mortgage term.
If you’re switching from an interest-only to a repayment mortgage, your monthly payments will be higher, but you will have paid off both the interest and the capital you owe by the end of the mortgage term.
How can I get an interest-only or repayment Buy to Let mortgage?First, you need to work out how much you might be able to borrow. You can do this with the help of our Buy to Let mortgage calculator. This works out the possible loan by comparing the value of your property and the amount of rent you expect to receive each month.
You can then search online for the best Buy to Let mortgage deals, and speak to one of our mortgage advisers who can answer any questions you may have. There is no charge for our service. It's fee free.