Should I 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 mortgages. Which one suits you best depends on your financial situation.
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 which will be tens or even thousands of pounds. 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.
At some stage, the mortgage will come to an end. You'll have agreed the date when you took the mortgage for. At this point, you'll have paid all the interest you owe but now you have to repay the capital as well which means finding a very large amount of money.
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. If you don't want to sell the property, you might be able to negotiate a new buy to let loan but it's safer to make sure you have enough money saved up to pay.
- you make lower monthly repayments
- 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
- it can provide a safety net for times when you've no rent coming in from your other properties
- it could be tax efficient as you can offset the interest payments against the rent you receive to reduce your income tax bill.
- when the mortgage ends, you still owe 100% of the money you borrowed
- you're relying on the property at least maintaining its value and preferably becoming worth more, which is risky because this doesn't always happen
- if you have to sell the house for less than you paid, you could have a serious financial problem
- you pay more in interest over the term of the mortgage because you haven't been paying off capital to reduce to amount you owe.
What is a repayment mortgage?
With repayment mortgages, you repay some of the capital you've borrowed every month in addition to paying the interest charge.
- you don't have to worry about repaying a huge amount of money at the end of the mortgage
- you can borrow a higher percentage of the purchase price
- if house prices go down, this doesn't affect your ability to repay the mortgage
- at the end of the mortgage term, you'll have paid every penny you owe and own the property outright.
- you'll have to pay out more each month because you're repaying capital and interest at the same time
- you can offset the interest element of your repayments against your income tax bill but not the capital payments.
Are all buy to let mortgages interest only?
Typically landlords choose interest-only buy to let mortgages because the monthly outgoings are less but you can choose a repayment buy to let mortgage if you prefer.
Should I get an interest-only mortgage if I'm buying to let?
You can but whether you should depends on your circumstances. Read through the pros and cons above for both repayment and interest-only mortgages to help you decide.
How can I get an interest-only buy to let mortgage?
First you need to work out how much you might be able to borrow. Look at 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.
Then 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.