Interest only vs repayment Buy to Let: Which should I choose?

Are Buy to Let mortgages interest-only or repayment?

The majority of Buy to Let mortgages are interest-only, but it is possible to get repayment mortgages too. When you take out a repayment mortgage, your monthly payments are made up of both capital and interest. Once you reach the end of your mortgage term, you’ll be mortgage debt-free. With an interest-only mortgage, you’ll just pay the interest each month - you won’t repay the capital until the end of your mortgage term. 

Learn more: Is Buy to Let worth it?

Is interest-only better for Buy to Let?

For many Buy to Let landlords, an interest-only mortgage is better than a repayment mortgage. This is because choosing interest-only makes the monthly payments lower, as you’re only paying off the interest each month. Many landlords choose this option, then repay the entire capital once they sell the property later down the line. But this can be risky if property prices go down instead of up. The right mortgage for you will depend on your goals, financial situation and the chosen property.

Let’s take a look at the pros and cons of each option.

Pros and cons of an interest-only Buy to Let:

Pros

🏠 Interest-only can be more affordable

Interest-only mortgages tend to be more affordable month-to-month, potentially resulting in a higher profit margin for the investor. As your repayments will be lower than they typically would be if you had a repayment mortgage, you’ll also be less likely to get into financial difficulties in between tenancies. 

🏠 You can sell the property to pay for the capital

Paying the equity off at the end of the mortgage term can have advantages, too. You might decide to sell the property and use the money from the sale to repay the lender. If house prices have risen since you bought the property, you could potentially make a profit from the sale, even after repaying the capital. 

🏠 You may be able to remortgage to buy more properties 

It may be possible to take advantage of rising house prices before your interest-only deal has ended. For example, you could remortgage your Buy to Let and use the equity released to purchase more investment properties. This process is often referred to as ‘leveraging’. 

It’s often possible to remortgage to a new interest-only Buy to Let product, but you’ll need to leave enough equity in your property to meet your lender’s minimum loan-to-value (LTV) criteria. It’s a good idea to get specialist mortgage advice before leveraging a Buy to Let property.

Cons

🏠 You won’t automatically own your property at the end of the mortgage term

When you reach the end of your interest-only mortgage term, you’ll still need to pay the capital.

Whereas when you reach the end of a repayment mortgage’s term, the property will be yours.

🏠 You may need a bigger deposit

When applying for an interest-only Buy to Let, you may need a larger deposit than if you applied for a repayment Buy to Let mortgage. This is because lenders often see interest-only mortgages as higher risk. A higher deposit provides the lender with more protection should you default on your mortgage or struggle to repay the equity at the end of the mortgage term. 

🏠 You may need to provide proof of your repayment plans

Some lenders will want to know how you plan to repay your interest-only mortgage. For example, through ISAs, savings, pensions or equity from the sale of your property. 

🏠 You’ll pay more interest overall

Although your monthly payments will be lower with an interest-only mortgage than they would be with a repayment mortgage, you’ll usually pay more in interest overall. This is because your outstanding mortgage debt will stay the same for the duration of your mortgage term, rather than decreasing over time. The interest you pay is worked out as a percentage of your outstanding loan, which doesn’t decrease over time.

🏠  You may struggle to repay the capital if your circumstances change 

If your financial circumstances have changed by the time you reach the end of your mortgage term, you may find it hard to repay the capital. If the value of your property falls, you’ll need to make up the difference between its sale value and the amount you borrowed. 

Now let’s look at the advantages and disadvantages of getting a repayment mortgage for a Buy to Let property.

Pros and cons of a repayment Buy to Let:

Pros

🏠  At the end of your term, you’ll own the property outright.

You’ll have paid off the capital gradually, so there’ll be no more payments due at the end of your mortgage term.

🏠 They’re usually cheaper overall than interest-only

If you’re happy to make larger monthly payments in exchange for a cheaper mortgage deal overall, you might be better suited to a repayment mortgage. They’re usually cheaper than interest-only deals because the amount of interest you owe will decrease over time. 

Cons

🏠 Your monthly costs can be higher

Since a repayment mortgage involves paying the capital and interest each month, your monthly costs are normally be higher. This could make it harder for you to make a profit on your investment and even cause financial strain if your property is ever empty. Before buying a Buy to Let property with a repayment mortgage, you’ll need to crunch some numbers to make sure you can turn a profit.

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Can I get an interest-only Buy to Let mortgage?

Yes, it’s possible to get an interest-only Buy to Let mortgage. To get an interest-only Buy to Let mortgage, you’ll first need to meet a lender’s criteria, which differs between providers. Each lender will carry out their own affordability checks as well. A mortgage broker like us can help you find the right lender and mortgage deal for you from across the market.

As a general rule, most lenders favour borrowers who:

• Have a good credit rating
• Earn more than £25,000 a year
• Are under the age of 70 or 75 when the mortgage term ends
• Own their home outright or have an existing repayment mortgage

Some lenders will approve interest-only Buy to Let applications for borrowers who don’t meet the above criteria, but it can be hard to track these lenders down without specialist advice. This is where we can help!

Our team of expert mortgage brokers can help you get a Buy to Let mortgage, whether your application is straightforward or complex. We’ll start by weighing up your options to determine whether an interest-only or repayment mortgage is right for you. Then, we’ll compare mortgage deals from more than 100 different lenders, before submitting your application on your behalf. Get started by creating a free Tembo recommendation today.