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HomeBuy to LetBuy to let repayment mortgage

Buy to let repayment mortgage

Last updated on 10th December 2023 by Martin Alexander

While buy-to-let mortgages are popular on an interest-only basis, repayment mortgages also have advantages. This guide will explore why a buy-to-let repayment mortgage can be better than interest-only.

What is a buy-to-let repayment mortgage?

A buy-to-let repayment mortgage allows you to repay the capital and interest on a mortgage. As a result, the interest and capital you owe reduce with each mortgage payment, and you’d own your property at the end of your mortgage term.

In comparison, an interest-only mortgage will only allow you to repay the interest on your mortgage. Although this option can be cheaper monthly, you’d still need to pay the capital balance when your mortgage ends.

Why would landlords want a repayment mortgage?

Repayment mortgages can benefit landlords wanting to boost their income in retirement. With interest-only, you’d typically sell the property to repay the mortgage balance. On the other hand, a repayment mortgage allows you to own your buy-to-let outright, giving you a long-term passive income once your mortgage is paid.

Many portfolio landlords choose to keep 1-2 properties on a repayment basis, so they have a pension pot for retirement. Having a mixture of both interest-only and repayment can allow you to enjoy both advantages.

What are the benefits?

  • You’ll own the property outright at the end of the mortgage term
  • The interest on your mortgage will decrease over time
  • You’ll typically pay less interest as your mortgage reduces
  • You won’t need a repayment vehicle or exit strategy at the end of your term
  • Ideal for providing income later on in life
  • The property can be passed on to children or next of kin
  • You can build equity in the property, which you can use to buy more property

Are there any drawbacks?

  • Stricter affordability assessments as you’re repaying the capital, as well as interest on the loan
  • Higher monthly mortgage payments compared to interest-only
  • You’ll have little or no profit left over from rent, as most will go towards paying your mortgage
  • When you don’t have tenants, higher repayment costs are harder to manage
  • You’ll need to pay for maintenance and repairs yourself, as the rental income may not be enough

Interest-only is by far the most popular buy-to-let mortgage type. However, whether you choose to have a repayment or interest-only mortgage depends on your investment goals.

An interest-only mortgage allows you a better monthly cash flow. Monthly payments are much cheaper as you only pay the interest, not the capital. However, you’ll require a repayment vehicle to pay the mortgage, so you may need to sell the property to do this.

If you’d prefer more income each month, as opposed to owning a property in the future, interest-only could be a better option.

Learn more: What is an interest-only buy-to-let mortgage?

Am I eligible for a repayment buy-to-let mortgage?

You’ll need to meet the following criteria to get a repayment buy-to-let mortgage:

  • Be an existing homeowner – Most lenders require you to be a homeowner for a buy-to-let mortgage, whether repayment or interest-only.
  • Have a sufficient rental income – Your rental income must be at least 125% of your monthly mortgage payments, which can be difficult on a repayment basis.
  • Income from employment – As affordability can be tight, lenders may assess your income to show you can repay the mortgage even when there’s no rent.
  • Deposit amount – You’ll need at least a 25% deposit for a repayment buy-to-let mortgage. Some lenders may accept less but will charge higher rates.
  • A good credit history – As an existing homeowner, lenders will check whether you’ve paid your mortgage late in the past six years. Evidence of paying on time will help your mortgage application.

Can I switch a buy-to-let from an interest-only to a repayment mortgage?

You can switch from an interest-only to a repayment mortgage, but you’ll undergo a new affordability assessment. This is because your monthly mortgage will likely increase, so lenders need to check if it’s affordable.

Landlords typically do this to hold on to a property rather than sell it at the end of a term. It could have increased in value and is a sought-after property you want to keep. Switching to a repayment mortgage allows you to do this.

Speak to a buy-to-let mortgage advisor

Many of our advisors are landlords and have invested for several years. Getting a buy-to-let mortgage goes beyond the mortgage type you choose to have. As we’ve established, there isn’t one mortgage type that’s better than the other. There are many different variables to consider when selecting the most suitable mortgage for your investment.

An advisor can discuss your buy-to-let goals to establish whether an interest-only or repayment mortgage is better suited. Furthermore, we’ll compare rates to give you an idea of the differences in cost.

Having the right mortgage can help you achieve your investment goals quicker than having a poorly chosen product. You can call us today on 0800 195 0490 or make an enquiry for further information.

About the author

Martin Alexander
Senior Mortgage Advisor

Martin is a senior mortgage advisor who has held a CeMAP qualification for over 15 years while completing an MBA in Global Banking and Finance.