Why choose an interest only mortgage for your Buy to Let?
Most landlords weigh up whether to opt for an interest only mortgage or a repayment mortgage. Much will depend on how you intend to use the property and income in the future.
We can help you make this decision by doing all the calculations and breaking down the options for you.
With an interest-only mortgage, you’ll only pay the interest owed and none of the capital you’ve borrowed. This generally makes your monthly payments lower than if you were on a repayment mortgage. When the mortgage term ends, you’ll then have to repay the entire capital balance or sell the property.
Most landlords assume that house prices will have risen over the period of the mortgage. This will provide enough money from the sale of the property to repay the capital, pay any tax due and have some profit left over. The best advice is to put aside money each month in case your house doesn’t increase in value as hoped.
The amount you pay on your Interest Only Mortgage will be much less than the monthly income you generate from the property therefore providing you with a greater profit margin. If you go for a repayment mortgage your payment will be higher meaning more of the rental income will be used up by paying the mortgage. However, your mortgage will reduce over the years meaning you’ll have greater equity within the property in the later years.
But don’t worry we’ll go through all the pros and cons with you. We will let you know how much you can borrow, and which is the most suitable option for you.
We will work hard for you to help ensure you get a positive result.
A MORTGAGE IS A LOAN SECURED AGAINST YOUR HOME. YOUR HOME MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE OR ANY OTHER DEBT SECURED ON IT.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
What is a buy to let interest only mortgage?
A buy to let interest only mortgage is a mortgage where your monthly payments usually cover the interest only, rather than repaying the capital balance as well.
This means the monthly payments are often lower than with a repayment mortgage, which is one reason many landlords consider this type of borrowing. However, the mortgage balance itself is not being reduced during the term in the same way as it would be on a repayment mortgage.
At the end of the mortgage term, the outstanding capital still needs to be repaid. That is an important part of the decision and should be thought about from the outset.
Why do landlords choose interest only buy to let mortgages?
Many landlords choose interest only because it can help keep monthly mortgage payments lower and leave more room in the rental figures.
This may appeal if you want to:
- Improve monthly cash flow
- Keep more rental income available for maintenance, voids or other costs
- Maximise rental margin
- Structure the property as a longer term investment
For some landlords, interest only fits their overall strategy well. For others, repayment may feel more suitable because it reduces the mortgage balance over time. The option for you depends on how you plan to use the property and what your long term intentions are.
Interest only vs repayment for buy to let
When choosing a buy to let mortgage, one of the key decisions is whether interest only or repayment is likely to suit you better.
With an interest only buy to let mortgage, the monthly payments are usually lower because you are generally paying the interest only. This can help with affordability and rental margin, but the capital still needs to be cleared later.
With a repayment buy to let mortgage, your monthly payments are usually higher because you are paying back both the interest and part of the capital. This means the mortgage balance reduces over time, which some landlords prefer.
Neither option is automatically better. It comes down to what matters most to you, including:
- Monthly cash flow
- Long term investment plans
- How comfortable you are with the capital repayment strategy
- Whether you want the balance reducing over time
What happens at the end of an interest only buy to let mortgage?
This is one of the most important questions to think through before taking out an interest only mortgage.
Because the capital is not usually being repaid through the monthly payments, you still need a plan for how that balance will be cleared at the end of the term.
Depending on your circumstances, that may involve:
- Selling the property
- Refinancing or remortgaging later
- Using other funds available at that time
This is why it is important not to focus only on the lower monthly payment. The exit strategy matters too, and it is worth discussing that early rather than leaving it as a problem for later.
What do lenders look at for a buy to let interest only mortgage?
Lenders will usually look at more than just your personal income when assessing a buy to let mortgage.
They may consider:
- The expected rental income from the property
- How the rental income performs under their stress test
- The loan to value
- Your experience as a landlord in some cases
- The type of property
- Your wider financial position
- Whether the application fits their buy to let criteria
Some lenders are more flexible than others, so the right lender match can make a real difference, especially where the case is more specialist or the property type is less straightforward.
Things to consider before choosing interest only
An interest only buy to let mortgage can work in some circumstances, but it is important to understand the wider picture.
Points worth thinking about include:
- Lower monthly payments do not mean the capital disappears
- Rental income is not guaranteed
- Void periods, repairs and ongoing costs still need to be covered
- Property values may not rise as expected
- The plan for repaying the capital at the end needs to be realistic
A lower monthly payment can be attractive, but it should always be weighed against the longer term responsibility of the borrowing.
Can first time landlords get a buy to let interest only mortgage
Some lenders will consider first time landlords for interest only buy to let mortgages, while others may apply stricter rules depending on the case, the property and the applicant’s circumstances.
That is why it can be helpful to get advice early, especially if this is your first buy to let purchase and you want to understand how lenders are likely to assess the application.
Why speak to Your Mortgage Expert about buy to let interest only mortgages?
Choosing the right buy to let mortgage is not just about finding a product. It is about understanding how that borrowing fits your property plans, rental figures and longer-term goals.
At Your Mortgage Expert, we can help you:
- Understand how interest only buy to let mortgages work
- Compare interest only and repayment options clearly
- Look at likely rental stress testing and lender criteria
- Think through the end of term repayment plan
- Explore suitable options with High Street and specialist lenders
- Move forward with clearer, more confident advice
We help clients across the UK by phone and video, as well as offering in person appointments where appropriate.