Last Updated on 16th October 2020
Property investment has become very popular, especially in recent times. With low-interest rates, many savers choose to invest their hard-earned money instead. Buy to let has a great track record and can provide you with an income now and in retirement, especially if you have a buy to let repayment mortgage.
While buy to let mortgages are often more popular on interest-only, repayment mortgages also have advantages. The type of mortgage you choose will typically be based on your investment goals. A repayment mortgage will mean that you’ll own your buy to let outright, which can provide you with an income in your later years.
You may also be able to switch from an interest-only to a repayment mortgage. Doing so can provide you with a long-term investment that you could possibly pass down to children or family. This guide will look at buy to let repayment mortgages in more detail. Our advisors can also help answer your questions.
What is a buy to let repayment mortgage?
A buy to let repayment mortgage is a loan used to purchase an investment property and both the capital and interest are repaid. As a result, the amount of interest and capital you owe will reduce as the mortgage is repaid. If you make all of your mortgage payments, you’ll own your buy to let property outright at the end of your term.
Buy to let repayment mortgages are popular with those wanting to boost their income in retirement. If you own a buy to let outright, the rental income received will be all yours. Furthermore, if you sold the property towards the end of the term, you’re likely to make a capital gain.
Benefits of having a buy to let repayment mortgage
As with any mortgage type, there are benefits and sometimes even drawbacks. The main advantages with having a buy to let mortgage on a repayment basis are:
- 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 when compared to an interest-only mortgage
- You won’t need a repayment vehicle or exit strategy at the end of your term
- Ideal for providing income later on in life, such as retirement
- The property can be passed on to children or next of kin
Owning your investment outright is perhaps the biggest advantage of having a repayment mortgage. Although your mortgage payments will initially be higher than an interest-only mortgage, it will eventually decrease.
This is because your mortgage balance will decrease and so will the amount of interest you owe on your mortgage. It’s also why the total amount of interest will typically be lower than an interest-only mortgage overall.
Another benefit of having a repayment mortgage on a buy to let is that you won’t need a repayment vehicle or an exit strategy. This is because your mortgage balance would be zero at the end of your term, so you’d owe nothing to your lender. There’d also be no need to sell the property to pay the balance.
Owning a buy to let outright can provide you with a passive income each month. This can be ideal for retirement and your later years in life. Furthermore, it can be a debt-free asset that you’ll be able to pass on to your children or next of kin.
Drawbacks to having a buy to let repayment mortgage
There aren’t any major drawbacks to having a buy to let mortgage on a repayment basis. Nonetheless, there are things to consider before choosing this type of mortgage.
- Affordability assessments can be very strict
- Initial higher mortgage repayments compared to an interest-only mortgage
- Not every lender will offer buy to let on a repayment basis
- Can be difficult to get larger mortgages due to affordability
As repayment mortgages consist of paying both the capital and interest, monthly payments are often high. As a result, affordability assessments can be difficult. It can also be difficult to get larger loan amounts for the same reason.
Again, as initial repayments are high, the amount of rent you’re able to retain as profit may be less than you thought. For this reason, getting a buy to let on a repayment basis can be difficult. This is because some lenders don’t offer them due to their buy to let criteria.
Should I take an interest-only or a repayment mortgage for a buy to let?
Interest-only is by far the most popular buy to let mortgage type. That being said, whether you choose to have a repayment or interest-only mortgage depends on your investment goals.
An interest-only mortgage will perhaps allow you a better cash flow each month, especially towards the start of your mortgage. On the other hand, repayment mortgages often leave little cash flow each month. That being said, repayment mortgages tend to be cheaper overall, as the capital and interest are reduced as you repay the balance each month.
An interest-only mortgage will also require you to have a repayment vehicle or an exit strategy. This is because you’ll still owe your lender the entire capital balance at the end of your mortgage term. This is perhaps one of the biggest drawbacks for interest-only mortgages.
If you have a number of properties, you may feel as though you’d want to diversify from having every property on an interest-only basis. For instance, many portfolio landlords often have a mixture of both interest only and repayment mortgages. This can enable you to achieve the cash flow you require, along with owning properties outright for retirement.
You can speak to our advisors who will listen to what you hope to achieve from property investment. We’ll then be able to advise you accordingly as to which mortgage type will be the most suitable.
Learn more: What is an interest-only buy to let mortgage?
Speak to a buy to let expert
Many of our advisors are also landlords and have been investing 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 other variables to consider when selecting the most suitable mortgage for your investment. Having the right mortgage can help you to achieve your investment goals a lot quicker than a poorly chosen product. You can call us today on 0800 195 0490 or make an enquiry and speak to an advisor immediately.