Buy-to-Let Property: Should I consider an interest only mortgage?
One question our mortgage advisers are often asked is should I chose an interest-only or a repayment mortgage for my buy-to-let property.
Choosing the right mortgage can depend on a number factors: how many buy-to-let properties you own, your cash flow and the liquidity of your other assets, and your attitude towards managing debt and more complicated finances.
What is the diﬀerence between a repayment and interest-only mortgage?
With an interest-only mortgage, you only pay the interest on the loan each month. This means you are not repaying any of the outstanding debt, and the amount you borrowed does not decrease over time but remains the same.
This is different from a repayment mortgage which means you will pay back a portion of the loan as well as interest each month, until eventually the loan is paid back.
Why would I consider an interest-only mortgage?
What worries some buy-to-let investors is cash flow. If a property has a period of time without a tenant, it is important for financial plans to include making sure there are enough funds to cover the mortgage when income from tenants isn’t being paid.
Interest-only mortgages are popular with some buy-to-let investors because the monthly repayments are lower than a repayment mortgage. The rental income should cover more than the mortgage each month, allowing the landlord to build savings faster.
Many landlords use these savings as a financial buffer for the rental property to pay for repairs and to cover mortgage costs when the property is vacant. If you hold several buy- to-let properties, having this significant cash flow flexibility can be very useful.
When the amount held in savings accumulates to more than is needed in reserves, many choose to then pay a lump sum off the original loan to reduce the mortgage debt.
Most mortgage deals allow borrowers to make overpayments of 10 per cent of the total mortgage amount each year without incurring penalty charges.
Having a plan to repay the original loan
It is important to understand that an interest-only mortgage should only be considered alongside a viable repayment plan, and after the risks involved have been carefully thought through.
Mortgage lenders will want to know at the application stage how a borrower plans to pay back the mortgage. In some cases, buy-to-let investors plan to pay off the original mortgage loan by selling the property at the end at the end of the loan term, which can be in 20 years time.
In some cases the buy-to-let mortgage applicant can provide the lender with other evidence of financial stability and an ability to repay an interest-only loan in the future. This can be providing evidence of savings, stocks and shares, or another property that they would be prepared to sell.
Understanding the risks
Interest-only mortgages are not for everyone and their suitability can depend on your various factors including your appetite for risk, how comfortable you are at managing debt and whether you intend to purchase additional buy-to-lets in the future.
If you intend to own just one or two buy-to-lets, then a straight-forward capital repayment mortgage may be a better approach. If you are planning on becoming a portfolio landlord, then interest-only mortgages can provide greater cashflow and liquidity within a property portfolio and provide greater financial security and stability.
Whilst lower monthly payments might appear attractive, it should be remembered that it is also possible to reduce the monthly costs of a repayment mortgage by extending the term. A good mortgage adviser will help you to explore all of your options.
We are here to help
Our team of mortgage advisers at Furnley House are here to help you with a mortgage or to find new mortgage deals for a wider buy-to-let portfolio. To find out more call 0116 269 6311 or email email@example.com.
All information correct at the time of writing.
Your home may be repossessed if you do not keep up repayments on your mortgage.