Interest Only Buy To Let Mortgages

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    Interest Only Buy To Let Mortgages From The UK’s Leading Lenders

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    What is an interest-only buy-to-let mortgage?

    An interest-only buy-to-let mortgage is a mortgage where you are only required to pay the ‘interest’ on the loan each month.

    It is typically the most common repayment type used on a buy-to-let mortgage for the following reasons:

    Lower monthly repayments – as you are only paying the interest on the loan, the payments can be significantly lower than compared to a full repayment mortgage.

    Better cash flow – lower monthly payments allow for a greater level of cash flow, which in turn can help to cover associated costs, such as maintenance, repairs and fees.

    More flexibility – you have the option to make overpayments as and when you wish (subject to lender conditions), which can help reduce the balance of the loan and subsequently reduce your interest-only payments.

    Interest Only Buy-To-Let Mortgages

    Author: Darren Ferguson – Mortgage Specialist & Owner

    First Published: 08th November 2023

    Read Time

    Read Time – Approximately 4 Minutes

    Our Interest-Only Buy-To-Let mortgage guide should be helpful, but it’s always best to speak with an adviser to discuss your own personal circumstances and to get the best advice. Call us on 01604 212879 should you have any questions.

    How does an interest-only buy-to-let mortgage work?

    To understand how an interest-only mortgage works, it’s best to compare it to a repayment mortgage.

    On a repayment mortgage, your monthly mortgage repayment will comprise of 2 parts:

    • An amount for the interest you owe on the outstanding balance
    • An amount to pay back some of the amount borrowed. This is called the ‘capital’ or the ‘principle’.

    To illustrate this better, look at the two images below, one for a capital repayment mortgage and the other for an interest-only mortgage.

    These images show the first 12 months of payments for a mortgage based on £200,000, at a rate of 4.49%, over a term of 25 years.

    Capital Repayment Mortgage

    table showing monthly payments on capital repayment mortgage

    On the repayment mortgage example – the total monthly payment is £1,110.53, comprising of 2 amounts, an amount of £748.33 for the interest element and £362.20 for the principal element, which has then reduced the amount owed to £199,637.80.  If these payments are maintained for 25 years, the mortgage balance is guaranteed to be repaid.

    Interest Only Mortgage

    table showing interest only buy to let mortgage payments

    On the Interest-only mortgage example – the total monthly payment is £748.33, as all you pay is the interest on the balance owed. As there is no repayment on the capital, the balance will remain at the original amount borrowed, £200,000, in this example. At the end of the 25 years, the total amount will still be outstanding and must be repaid.

    Why would you take out an interest-only buy-to-let mortgage instead of repayment?

    Most landlords prefer interest-only mortgages because of the flexibility they provide. They can offer a cashflow buffer that perhaps you wouldn’t get with a repayment mortgage, where the margins might be a lot tighter between the rental income and your mortgage payment.

    Landlords also invest in buy-to-let property to benefit, hopefully, from the property increasing in value, with a plan to sell the property in the future and bank any uplift in value, after paying any applicable taxes.

    Are all buy-to-let mortgages arranged on interest-only?

    No, many landlords opt to arrange the mortgage on a capital repayment basis, and the choice is ultimately up to you. However, there are a small number of lenders who either won’t lend on a repayment basis or affordability can be impacted by arranging the mortgage on a repayment basis. 

    Most landlords, however, typically arrange a buy-to-let mortgage on an interest-only basis.

    Advantages of Interest Only

    Landlords typically choose an interest-only mortgage because the payments are lower, allowing them to save more of the rental income they receive. This saved income can then be used to build up a deposit for a further buy-to-let property or used for funds to help repair and maintain the property.

    Help with rental voids.

    Occasionally, a landlord may have a period where a property is vacant, perhaps waiting for a new tenant or doing repairs or upgrades. An interest-only buy-to-let mortgage can help with rental voids because the payments are more manageable when you have no rental income coming in.

    An option to consider if you want to protect yourself against potential rental voids but still benefit from reducing the capital is to arrange the mortgage on an interest-only basis and secure a product that allows for overpayments without any early repayment charges. You can then set up a regular overpayment to help reduce the capital element of the loan. Typically, any overpayment you make comes straight off the mortgage balance. If, for some reason, you then have a void, you can stop the overpayments for a period until the property is let again and then continue with the overpayments.

    Disadvantages of Interest Only

    The main disadvantage of an interest-only buy-to-let mortgage is that you are not repaying any of the original amount borrowed, and at the end of the mortgage term, the debt will need to be repaid.

    Unless you have other funds to repay the mortgage in full, you’ll likely need to sell the property to clear the loan. With a repayment mortgage, and provided you have maintained your required repayments, you will own the property outright at the end of the term.

    As you are not repaying any of the capital, this means that over the mortgage term, you will pay more interest than what you would have done on a capital repayment mortgage.

    With an interest-only buy-to-let mortgage, you also rely on the property to increase in value. Should economic conditions change, which results in a reduction in property value, this will impact your loan to value, which could subsequently affect the choice of products available when you need to remortgage. 

    Call us on 01604 212879 for a no obligation buy to let mortgage review

    Deposit requirements for Interest Only BTL

    Choosing to arrange the mortgage on an interest only or a capital repayment basis does not change how much deposit you require. This will typically be the same, whatever method you choose. This criteria is typically the same whether the property is to be purchased in a limited company or in an individual name.

    The best buy-to-let mortgage rates will usually start at around 60% loan to value (LTV), with most lenders happy to go to 75%, and a small number up to 80% or even 85% loan to value. The higher the LTV, the higher the rate will be.

    Can I switch my mortgage to interest-only at a later date?

    Yes, if you have a repayment mortgage and wish to switch it to interest-only, most lenders will allow you to do so. You should check with your lender or ask your adviser to check this before completing on the mortgage. However, bear in mind that lender criteria can change, and whilst this may be available when you first take the mortgage out, the lender’s criteria may have changed when you ask to switch.

    Calculating Interest Only mortgage payments

    Calculating the monthly payment on an interest-only buy-to-let mortgage is far simpler than working out the payment on a capital repayment basis.

    You need to know the loan amount and the interest rate to be paid.

    For example:

    If the loan amount is £100,000 and the rate is 5%, you would multiply £100,000 by 0.05, which equals £5000. This is the annual interest, which you would then divide by 12 for the monthly payment

    £5000 / 12 = £600 per month.

    If you have a percent button on your calculator, you can also do £100,000 multiplied by 5 and then press the % button, which will give you the £5000, then divide by 12.

    On an interest-only buy-to-let mortgage, and unlike with a capital repayment mortgage, the loan term makes no difference. Whether you do the mortgage over five or 25 years, the monthly payment will be the same because you are just repaying the interest.

    Loan amounts available will depend upon several factors, so we recommend reading our guide to buy to let rental stress testing to find out more.

    Interest Only Buy To Let Mortgage Calculator

    Use the calculator below to work out what your buy-to-let mortgage payments would be on an interest-only basis.

    To explore HMO mortgage rates, visit our  HMO Mortgage Rates

    To explore Limited Company BTL Rates, visit our  Limited Company BTL Rates

    For Multi-Unit Block rates visit our  Multi-Unit Block Mortgage Rates

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    Looking to let your current residence? Find out more with our guide to Let-to-Buy Mortgages.



    A selection of some of our Interest Only Buy-To-Let Lenders

    We source our mortgages from the whole market, from the leading High St Banks & Building Societies to specialist buy-to-let mortgage lenders. A selection of our lenders is shown below.