Repayment Buy-to-Let Mortgage Borrowing Explained
A capital repayment buy-to-let mortgage works similarly to a normal residential mortgage in terms of repayments. Every month you pay the interest owing plus a small amount of the original capital borrowed to buy the property. As you maintain repayments on buy-to-let mortgage agreements, the outstanding balance falls, and the proportion of your monthly payment allocated to capital grows.
Interest-only buy-to-let mortgage products work differently. The landlord pays solely the interest each month without repaying any of the amount borrowed.
The lender will need to know the landlord’s exit plan as part of the interest-only buy-to-let mortgage criteria assessment. Typically, they will plan to sell the property or refinance when the interest-only mortgage ends.
Each option can be suitable, depending on your objectives. The big difference is that if you took out a buy-to-let mortgage for, say, £500,000 on an interest-only mortgage, you would still owe £500,000 after the end of the term. A landlord with a repayment buy-to-let mortgage would pay much more per month but have a zero balance.
Advantages of Using a Repayment Buy-to-Let Mortgage
Comparing buy-to-let mortgage repayment or interest-only products very much depends on your financial position and the projected rental income your buy-to-let will generate. The positives include:
- Owning the property in full at the end of the buy-to-let mortgage term, with no further debt owing.
- Reducing interest payments over time, with a larger amount of capital repaid each month. Refinancing after repaying a chunk of the capital will mean you can secure better interest rates since your borrowing loan-to-value will be lower.
- A lower total cost of interest against the value borrowed.
Although these are all great reasons to consider a repayment buy-to-let mortgage, we’d also recommend you research the downsides and are certain this type of repayment structure is right for you. The negative aspects include:
- Higher monthly payments mean you will need to pass stricter affordability criteria and have a higher monthly rental income to cover the repayments.
- Fewer lenders to choose between since repayment buy-to-let mortgage products are usually only accessible through specialist mortgage providers.
- Overall borrowing available may be lower than for an interest-only mortgage due to the affordability limitations.
As an independent, whole-of-market broker with years of expertise supporting clients in buy-to-let mortgage applications, the Revolution team can work through these pros and cons with you in more detail on request.
Choosing Between a Buy-to-Let Mortgage Interest-Only or Repayment Product
The end decision will rely on several variables, including the deposit you have available, the rent you expect to earn through the property, and your affordability assessment. Interest-only buy-to-let mortgage products are more affordable since the monthly costs are lower. Should you have a vacant period, you will still need to cover the payment value regardless of whether you have a buy-to-let mortgage repayment or interest-only product.
However, the primary drawback of an interest-only buy-to-let mortgage is that the loan is not repaid – you will have to remortgage or sell the property when the mortgage terms end to pay back the value originally borrowed.
Interest payments as a cost of borrowing are also higher on interest-only buy-to-let mortgage agreements.
Case Study: Comparing a Buy-to-Let Mortgage Interest-Only or Repayment Agreement
To illustrate what these differences might look like in a real-world scenario, we’ll consider a buy-to-let mortgage for a small rental property costing £160,000, with an interest rate of 4% and a standard 25-year loan term.
An interest-only buy-to-let mortgage would cost just over £533 each month, with a total interest cost of £159,999 over 25 years. The original £160,000 would remain outstanding and need to be paid when the loan term ends – so the overall cost of borrowing is £319,999.
Using a repayment buy-to-let mortgage would mean higher monthly repayments of £844.54, but including the interest and the capital, repayments would cost a total of £253,362 over the same 25-year period.
The table below summarises how these buy-to-let mortgage options compare financially:
|
|
Interest-Only
|
Repayment
|
|
Monthly Payment
|
£533.33
|
£844.54
|
|
Total cost of interest
|
£159,999
|
£93,362
|
|
Overall mortgage cost
|
£319,999
|
£253,362
|
While this is a simplified example, and a lot will depend on the buy-to-let mortgage interest rates you are offered on either product, it shows the main ways these types of agreements differ.
Other Rental Property Costs That Impact Your Buy-to-Let Mortgage Options
Although the monthly repayment costs and anticipated rental income will affect your affordability, landlords are also advised to factor in stamp duty charges to ensure any buy-to-let mortgage they apply for will be financially viable.
In the UK, rental property acquisitions that are a second property purchase attract an additional 3% stamp duty charge, with current rates as follows:
|
Property Value
|
Stamp Duty
|
Including Additional Levy
|
|
Up to £250,000
|
0%
|
3%
|
|
£250,001 - £925,000
|
5%
|
8%
|
|
£925,001 - £1.5 million
|
10%
|
13%
|
|
£1.5 million or above
|
12%
|
15%
|
Buy-to-Let Mortgage Criteria on Capital Repayment Agreements
Lenders have their own policies, criteria and lending rules, so your buy-to-let mortgage options will depend on the amount you wish to borrow and whether you’d like to make capital repayments on buy-to-let mortgage borrowing as you go.
As we’ve explained, repayment buy-to-let mortgage products are less common and available from fewer lenders. You would also need to adhere to more rigorous affordability checks and demonstrate a higher rental income to evidence your ability to make the monthly repayments.
Our recommendation is always to consult an independent, experienced buy-to-let mortgage broker who can suggest lenders most suited to your application and ensure you make the right choices based on the values involved and the nature of the rental property.
There isn't one lender we would advise every buy-to-let investor apply to since their ability to lend will depend on an evaluation of varied factors, including:
- The property value and expected rental income.
- Your other income, debts and affordability.
- Credit file checks and financial history.
For further information about buy-to-let mortgage repayment or interest-only options, and which is ideal for your rental property portfolio, please get in touch with the Revolution Finance Brokers team at any time.
