HomeBuy to LetInterest-only buy-to-let mortgages
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HomeBuy to LetInterest-only buy-to-let mortgages

Interest-only buy-to-let mortgages

Last updated on 11th December 2023 by Martin Alexander

Interest-only mortgages are popular among buy-to-let landlords, and there are good reasons. An interest-only buy-to-let mortgage can keep monthly costs low, especially compared to a repayment mortgage.

The type of buy-to-let mortgage you choose will depend on what you hope to achieve from your investment. Interest-only can give you better monthly rental profits. However, a repayment mortgage can allow you to own your buy-to-let when your mortgage ends.
Although landlords prefer interest-only, repayment mortgages are still an option. Read this guide to make a more informed decision on the right mortgage for you.

What is an interest-only buy-to-let mortgage?

An interest-only buy-to-let mortgage allows you to pay only the interest on the loan rather than the mortgage itself. You’d pay the mortgage balance when the term expires, usually by selling the property. As a result, monthly mortgage payments are lower than a repayment mortgage.

Most landlords choose this route to save more investment income each month. The surplus rental income can fund other property purchases and maintain your existing buy-to-let.

Are all buy-to-let mortgages interest-only?

Lenders offer both repayment and interest-only mortgages for buy-to-let. The difference between the two is how you’d repay the mortgage. Lenders also have different rates, terms and fees for each mortgage type.

With a repayment mortgage, you’d pay the capital and interest on the loan each month. Your monthly payments will be higher than interest-only, which is why most landlords prefer interest-only over repayment mortgages. However, you’d own the property outright when your mortgage ends.

Why is interest-only better for buy-to-let than repayment?

Interest-only has several advantages for buy-to-let when compared to a repayment mortgage:

Lower monthly payments

The main advantage of having an interest-only mortgage is that monthly payments are much lower, allowing landlords to enjoy more rental profit.

Lower monthly payments also allow for an increase in monthly rental profits. The additional income can fund maintenance issues, insurance and professional costs such as letting agent fees.

A higher monthly rental income allows landlords to grow property portfolios much faster, as income can fund more property investments.

No minimum income requirements

Interest-only mortgage assessments tend to be easier than repayment mortgages. Many lenders don’t have income requirements for buy-to-let, as the investment property will create an income to pay the mortgage. Your buy-to-let must be at least 125% of the mortgage payments, which is usually sufficient to pass an affordability check.

As repayment mortgage payments are higher, affordability checks can be difficult to pass. Although lenders will consider your rental income, you’ll still need to show an income large enough to pay your buy-to-let and any other mortgages you may have. This can be particularly useful if you’re worried about meeting a lender’s affordability requirements.

Read more: What is a buy-to-let repayment mortgage?

Easier to switch deals

Depending on the deal, lenders offer discounted rates, fixed for 2-5 years. You can then remortgage, so when the fixed period ends, you switch to another discounted rate rather than paying a standard variable rate (SVR), which can be very high.

As interest-only mortgage assessments are less strict than repayment mortgages, switching deals is easier. As a result, you can keep your mortgage payments low and have a better chance of being eligible for other deals.

Learn more: How to remortgage a buy-to-let property

Benefit from an increase in property prices

If you decide to sell your buy-to-let to repay your mortgage, you could benefit from increases in property prices.

With an interest-only mortgage, your balance remains fixed, as you only pay interest. However, when you sell the property, you retain any leftover capital, which can be significant if your mortgage is on a 20-25-year term.

Are there any disadvantages?

There are also some disadvantages with interest-only, such as:

You won’t own the property when your mortgage ends

The main disadvantage is that you won’t own your investment property at the end of the mortgage term, as you don’t pay anything toward the actual mortgage balance.

When your mortgage ends, you’ll still owe the balance, which is why most landlords sell the property to cover the loan amount.

Some lenders may allow you to make capital repayments during your mortgage term, reducing your balance each time. However, it depends on your lender and any early repayment charges your mortgage includes.

You’re likely to pay more interest

You’ll pay more interest overall when compared to a repayment mortgage, as your mortgage balance will stay the same throughout.

With a repayment mortgage, you pay towards the balance, so the amount of interest owed will also gradually reduce.

You’ll need a repayment plan

You’ll need to settle your mortgage balance when it ends, so you’ll need an exit strategy. Many landlords choose to sell their investment properties as an exit from the mortgage.

There is a risk to doing this, especially if property prices fall around the time you wish to sell. That said, it’s unlikely to happen if you have a long-term mortgage exceeding twenty years.

Am I eligible for an interest-only buy-to-let mortgage?

The primary factor lenders will assess is whether the rental value is high enough to repay your mortgage. To be eligible, your rental income must cover 125% of your monthly mortgage.

Lenders have varying buy-to-let criteria, but you must meet the rest of an application to be eligible. For instance, you’ll need at least a 25% deposit to qualify. Lenders will also check your credit file, income, and outgoings to ensure you’re managing your finances.

Most lenders also require applicants to be existing homeowners to get a buy-to-let mortgage.

What deposit will I need?

Your deposit amount will depend on the type of property you’re buying, but you’ll typically require a 25% deposit for a buy-to-let.

If the property you’re buying requires refurbishment, you’ll likely need a deposit of 35% or higher. Some lenders may decide that the property requires too much work and won’t lend. A new build buy-to-let will also require deposits of around 35%, as lenders view new properties as higher risk.

How much can I borrow?

Lenders will assess your rental value rather than your income to determine how much you can borrow. A surveyor will also visit the property to ensure the amount you’re paying is suitable. You can use our calculator to check what you could be eligible for.

Speak to a buy-to-let advisor

There are many different types of buy-to-let mortgages, and just because interest-only mortgages are popular with investors, it doesn’t mean it’s the right choice for you.

An advisor can discuss your options and what you hope to gain from owning a buy-to-let. Lenders also have different rates that you’ll need to compare. Our experts can guide you through the process while finding suitable lenders.

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.