BTL Mortgages: Interest-Only vs Repayment -16/02/2021

Generally, the minimum deposit for a buy-to-let (BTL) mortgage is usually 20-40% of the property’s value. Most BTL mortgages are interest-only, which means that landlords only pay monthly interest payments, though the mortgage must be repaid in full at the end of the term. Deciding whether to take an interest-only or repayment mortgage is a difficult decision, so we have made it simple:

Interest-only Mortgage:

Interest-only BTL mortgages see you only paying the interest on the loan each month – not the capital borrowed. At the end of the mortgage term, a landlord owes the lender the amount borrowed.

Many landlords use the monthly rental income they receive from their tenants to cover the interest payments, then opting to use the money gained from selling the property to cover the remaining cost – thought it is strongly advised not to rely on selling the property to cover these costs.

Advantages:

  • Lower monthly repayments
  • Could leave you with money to spend on buying on improving other BTL properties in your portfolio
  • Provides safety net for times when you have no rent coming in from other properties

Disadvantages:

  • When the mortgage ends, you still owe 100% of the money borrowed
  • You are relying on the property maintaining/increasing in value

Repayment Mortgage:

Repayment mortgages will cost more each month, with the amount being made up of interest on the loan and paying back a portion of the capital borrowed. The repayments are structured so that by the end of the time, both the interest and the capital borrowed are paid of in full and the property is owned outright.

Advantages:

  • No concerns about repaying a huge amount at the end of the mortgage
  • If house prices fall, it does not affect your ability to repay the mortgage
  • You will own the property outright by the end of the term

Disadvantages:

  • Increased monthly repayments as you are paying interest and capital at the same time
  • Risk of losing other properties in your portfolio if you are unable to keep up with repayments

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The world of Property is a difficult one to master, even more so in the current state of the world. Knowing what mistakes to avoid and what advice to follow can be challenging – so we have made it simple:

Our Director Andrea L Richards has written an E-Book on the most common mistakes made by the Property Sector and expert advice on how to avoid and overcome them.

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