The trend for buy-to-let mortgages has been to go for Interest Only.
With the Government recently removing mortgage interest relief. It can be in your best interest to look at repayment or part-repayment buy to let mortgages. To give you better returns on that investment over the years.
Landlords looking to expand their portfolio may prefer interest-only mortgages. Allowing lower payments, to save for further deposits for further properties, giving higher returns. Known as leveraging.
Whatever your plan our mortgage advisers can obtain for your repayment, part-repayment, interest-only and offset buy-to-let mortgages.
Can I get a Interest Only Buy-To-Let Mortgage?
Yes - Interest Only Mortgages are available for Buy to Let Investment.
Interest Only Buy to Let Mortgage Products are widely available from mortgage lenders. This is a considerable difference to residential mortgages in which after a FCA Intervention mortgage lenders removed there products - often only available at a very low LTV or those with high income.
As of writing you can obtain a Buy to Let Mortgage on an Interest Only basis all the way up to 85% Loan to Value (LTV).
Interest Only mortgage are most popular repayment type; as they say "Cashflow is king".
What is a Interest Only Buy to Let Mortgage?
An Interest Only Mortgage is a when you pay only the interest amount on the loan only - not repaying any amount from the total loan you borrowed from the mortgage lender.
This means if you borrowed £100,000; at the end of the mortgage term you will still owe £100,000.
At the end of the term; you can remortgage or sell the property to repay the lender in full.
Are Interest Only Mortgages Cheaper?
Yes - the monthly payments on an Interest Only Buy to Let mortgage is much cheaper compared to a full repayment mortgage.
This can be deceptive as you are not paying anything back that you borrow, only maintaining the interest. It can be "more expensive" as payments of interest are based on the full loan amount rather than a deceasing loan amount on a repayment mortgage. Put simply over time, as more and more of the original loan is paid off, the repayment amount reduces.
In comparison - when you come to sell the property you pay Capital Gains based on the equity in the property
Should I choose repayment or interest only buy to let mortgage?
The main point to recognise is your "attitude to risk". An interest only mortgage is defined as having a higher risk as at the end of the mortgage term you still owe the full amount.
That risk arises as if house prices fall, this decreases your equity. To refinance at the same loan to value you have to find a significant sum of funds. Compared to a repayment in which you have been reducing the loan. (Note: You can still go in negative equity with repayment loans).
Except - During void periods or if tenants fail to pay rent. You will still have a mortgage commitment the "risk" of default on your mortgage is lower on Interest Only as the payment is lower.
There are certain tax implications too; which you should discuss with your accountant. At the time of writing the "interest" paid is tax deductible but the "repayment" sum is not. When you come to selling the property you will pay capital gains on the equity - if you have lowed the loan capital gains can be payable on your new equity. This means it can be more tax efficient to be on interest only.
The main benefit for interest only mortgages - is the monthly profit. As with interest only the mortgage payments are lower, you will have more funds in your bank after payment of the mortgage from the rent.
This means the interest only route is often more suited to investors looking to build a portfolio as you have greater cashflow - perhaps to build a deposit for the next purchase.
The repayment route is often suited to investors using property as an alternative pension plan, with repayment you can be sure that at the end of the mortgage term the full loan is repaid.
Can I make overpayments on Interest Only?
This will depend on your mortgage lender and your contact.
It is common that the lender will allow overpayments (reducing the loan amount) to a certain maximum amount per year. Thereafter a percentage penalty is applied to each overpayment.
There are some mortgages available with no early repayment charges.
How can I compare Repayment and Interest Only?
You can ask your mortgage broker to supply "Key Facts Illustration (KFI)" based on Interest Only and Repayment. This will show you the difference in mortgage payments and on the repayment basis how long it will take to repay.
Benefits of Interest Only:
Lower Mortgage Payments
Higher Rental Cashflow
Simpler Tax Submissions
Benefits of Repayment Mortgages:
Increasing Equity in Property
No Mortgage on property at end of the term.
A high initial payments but decreasing over the term.
Copyright © 2019 Bespoke Finance Direct Limited. All Rights Reserved.
Bespoke Finance Direct Limited is authorised and regulated by the Financial Conduct Authority (No. 715805).
Bespoke Finance Direct Limited is registered in England and Wales (No. 09623432) at 31 Church Lane, Pudsey, LS28 7LD.