Interest-Only Buy to Let Mortgages
- Buy To Let specialists
- Exclusive rates available
- 5-star reviews
What is an Interest Only Buy to Let Mortgage?
We have noticed that an Interest Only mortgage is a popular choice for Buy to Let landlords, with the majority of investors choosing to go down this route. In a nutshell, this is a mortgage product that allows borrowers to pay only the interest on the loan each month for the duration of the agreement, with the mortgage balance remaining at a constant level. At the end of the mortgage term, the borrower must then pay off the entire loan balance.
The advantage of an Interest Only mortgage is that your monthly payments are much lower than they would be for a typical Capital Repayment scheme, creating a greater surplus from the rental income after any related costs. This surplus will be helpful should any unexpected costs arise, or can be reinvested in modifications, renovations or new property. The mortgage amount itself is usually settled by selling the mortgaged property (assuming that it has gained in value), or other assets.
Interest-Only Buy to Let Mortgages Information
Interest Only Buy to Let Mortgage Advice
The investment property market and Buy to Let mortgages can be a challenging sector, especially with changes to income tax relief rules in recent years. As landlords managing all kinds of rented properties look for ways to manage their cash-flow and minimise their monthly outgoings, an interest-only mortgage can seem like an attractive option.
At The Mortgage Centres, our team comprises specialists in all areas of the Buy to Let mortgages market who will be able to give you informed, balanced advice about which interest-only Buy to Let mortgage will be the most suitable for your circumstances.
How much deposit do I need for an Interest Only Buy to Let Mortgage?
You will typically need to provide a deposit of around 25% on an Interest Only Buy to Let mortgage, but some lenders may be willing to accept 15%, while others might require a higher figure. Much depends on the individual lender’s criteria – taking into account the anticipated rental income, an affordability test and the qualities of the property – which will dictate how much they are willing to lend against the property’s value, regardless of whether the mortgage is Interest Only or Capital Repayment. Bear in mind that the larger the deposit, the better the interest rate.
How much can I borrow with an Interest Only Buy to Let Mortgage?
This will depend on every aspect of the circumstances around the application – the type of property, the anticipated rental income, your personal income, your credit history and your existing portfolio of properties. But as a general guide, in terms of a percentage, a lender will generally consider the rental revenue as being 125% of your monthly mortgage payments, based on a 5% rate, and you can work back from there if you know the prevailing market rental rate for the type of property. The exact calculation for how much you can borrow will vary from lender to lender, according to their own methods of assessment.
What is the eligibility for an Interest Only Buy To Let Mortgage?
Lenders will look at a number of factors when considering an application for an Interest Only Buy to Let mortgage, but there are usually two main stipulations before they can proceed:
- Minimum age requirement – The minimum age at which you can get a standard residential mortgage is 18, but lenders will typically require someone applying for an Interest Only Buy to Let mortgage to be aged 21 or over, or sometimes even a minimum of 25 years old.
- Property portfolio limits – Some lenders are careful about over-commitment – they may ask for details of other Buy to Let properties under your control, and might restrict the number of mortgages you can take out with them to a maximum of three or five. They will likely make an assessment of your total portfolio size and exposure, and so if you have a portfolio of 10 properties or more, a specialist portfolio lender is probably going to be your best option.
While it’s possible for first-time buyers to apply for a Buy to Let mortgage, most lenders will not allow them to take out this loan on an Interest Only basis. However, some specialist lenders might make an exception – it’s worth discussing your plans with one of our experienced specialist mortgage advisors, who will be able to recommend the best options.
Advantages of Interest Only Buy to Let Mortgages
As a landlord, you will find the main advantages of an Interest Only Buy to Let mortgage lie in flexibility and tax efficiency.
As you would only be paying off the interest on the mortgage each month, your monthly payments will be a lot less than those for a Capital Repayment + Interest scheme, giving you more money to play with for investments, renovations, etc. This also means that the mortgage amount will stay the same for the lifetime of the mortgage, and at the end of the mortgage term, you will need a plan in place to repay the entire loan amount. A common way to do this is to sell the property, which should have gained in value over the years, to cover the loan and take a profit from the sale, or alternatively you could settle the loan by selling other assets and therefore retain the property for ongoing further income.
Tax benefits may depend on your own individual financial circumstances and tax status. As of 2017, landlords are only allowed to claim tax relief on mortgage interest payments at the basic rate, i.e. 20%. This reduced the benefit to landlords in the higher tax brackets, but there may be other advantages. We can offer sound advice regarding your mortgage situation and borrowing needs, but we cannot give you financial advice – it’s best to speak to a qualified accountant or tax advisor.
Disadvantages of Interest Only Buy to Let Mortgages
The main disadvantage of an Interest Only Buy to Let mortgage is that the actual loan amount will not reduce over the lifetime of the mortgage as it would with a Capital Repayment mortgage, meaning that the interest payments will not reduce either. This in turn means that you will actually be paying a greater amount of interest over the duration of the loan than you would otherwise.
You will need to create a long-term payment strategy to ensure that you will be able to repay the full loan amount when you come to the end of the mortgage term. Many landlords decide to invest in a specifically designed repayment vehicle scheme that should, over time, grow sufficiently in size to cover the loan amount and allow them to retain the property for further ongoing revenue, or to leave to the next generation. Therefore, a lot depends on the performance of the investment fund, and there is a risk that it will not have accrued enough value to cover the mortgage amount by the redemption date, in which case the landlord will be obliged to source further funds from other sources if they wish to retain the property.
The alternative is to simply sell the property by the redemption date and allow for a profit from its increased value over the years on top of the surplus in rent received during the time of ownership.
How do I pay back an Interest Only Buy to Let Mortgage?
This is the overriding issue with an Interest Only Buy to Let mortgage – that, at the end of the lifetime of the mortgage, the lender expects the full loan amount to be repaid. You can plan for this in a number of ways – the two main alternatives being as already discussed, with a possible third option remaining:
Selling the property at the end of the mortgage term
This is the most common solution. When the mortgage term comes to an end, the landlord will sell the property to pay off the loan, and the additional value in the property gained through inflation will be retained by the landlord as return on the investment, on top of the profits already made from the surplus in rent over the years.
Landlords will often invest in a repayment vehicle fund, with the plan being for the fund to grow in value sufficiently within the duration of the mortgage to cover the loan amount on the redemption date. This means the landlord will retain unencumbered ownership of the property for further ongoing rental income.
Partial capital repayments
While the mortgage is Interest Only, it is entirely possible to make lump-sum capital repayments during the lifetime of the mortgage, either on an ad-hoc basis or more regularly, to reduce the value of the loan over time, with a view to clearing the loan by the end date. Whether you can access this kind of deal will be down to the lender’s own criteria, and you will need to be careful to avoid plans with early repayment charges in these cases.
Finally, depending on the value of the property, the mortgage balance remaining and the age of the owner, it could be possible to refinance the Interest Only mortgage onto another mortgage with an extended term, or you could possibly convert the loan into an Equity Release plan.
Whether either of these options are suitable for you will depend on your individual circumstances, and you should discuss your options with one of our experienced specialist mortgage advisors.
Best Interest Only Buy to Let Mortgage Rates
The interest rate you are charged on your Interest Only Buy to Let mortgage will vary from one lender to the next, and will depend on the ratio of the mortgage in relation to the property value, and the duration of any fixed-rate term. You will also notice that interest rates are constantly shifting due to market conditions, consumer demand and lenders’ assessments of risks. The only way to get an accurate view on the most favourable interest rates you could be charged is through a proper appraisal of your circumstances and objectives with a knowledgeable specialist mortgage advisor, who will be able to advise you of the best options.
Lenders of Interest Only Buy to Let Mortgages
Many well-known high street lenders will have a Buy to Let offering within their range of products, but this will only be accessible via a broker or intermediary and it’s unlikely that you will find a broad choice of options. The main body of Buy to Let lenders operate within a specialist environment, also only available through expert brokers who are familiar with the market. A discussion with one of our specialist advisors will enable us to source options from all areas of the market, often including exclusive deals, to ensure you get the best mortgage for your needs.
Interest Only Buy to Let advice
Advice within the Buy to Let mortgage sector, whether Interest Only or Capital Repayment, is a very specialist area, requiring a lot of insider knowledge and a familiarity with all the lenders, their products and current trends. While many well-known providers offer Buy to Let mortgages, the best deals are usually available within the specialist market comprising lenders who may not be recognisable to the borrower, and will only accept applications via an intermediary, but are nevertheless major players in the mortgage industry.
Our team of advisors at The Mortgage Centres has access to the whole of the mortgages market and a huge amount of experience in handling applications for kinds of Buy to Let properties. A detailed discussion with enable us to offer firm recommendations as to the most suitable mortgage to meet your needs and the best next steps to take.
- Can I sell my mortgaged property to repay my interest-only mortgage?
- What happens at the end of the mortgage on an interest-only mortgage?
- Do I need an investment vehicle in place to have an interest-only mortgage?
- Can all mortgages be placed into interest-only?
- Can I change from interest-only to a repayment mortgage later on?
You may have arranged your existing interest only mortgage plan with an investment package like an Endowment Policy or an ISA in place designed to cover the mortgage amount at the end of the term, and this works for many. But the other common plan to repay your interest-only mortgage is to sell your property when the full mortgage amount is due. If property inflation has run its course as you would have liked, then your Buy to Let will have gained significantly in value over the years to cover the mortgage amount and leave a surplus for you to use as an income or reinvest in another property.
However, if you are looking to take out a new Interest Only Buy to Let mortgage, then be aware that in current conditions many lenders will not see the future sale of the property as an effective repayment plan, and may need to see proof that you have other means to repay the mortgage other than the value in the property itself. This said, criteria for borrowing does vary from lender to lender, and there are those who will accept the property being the only collateral, depending on the loan-to-value ratio of the mortgage, the value of the property, the demands of the market and many other variables.
As you know, with only the interest in the loan being paid off each month and the loan amount remaining the same, at the end of the interest-only mortgage term you will still owe the same amount that you did at the start of the plan. This figure will need to be paid off in full, either by selling the property and using the proceeds to settle the loan, or by using funds accrued within an investment vehicle set up with the sole intention of covering the mortgage, which should (if all has gone to plan) have grown sufficiently to cover the amount. The latter will mean you retain the property for further income generation, although if your investment fund is not large enough then you will need to find funds from other sources, or sell the home.
The short answer is Yes. The current laws around mortgage lending mean that providers must be sure you have the ability to meet your monthly repayments and have a plan in place to repay the entire loan at the end of the mortgage term. During your application process, the lender will take steps to verify your finances to ensure the proposed plan will cover all the funds due during the lifetime of the mortgage, and that your repayment vehicle will be on track to meet the debt.
In the past, lenders did not need to meet this level of verification when lending on an interest-only basis, and often lent to people without checking that there was a repayment plan of some sort in place. If you are in this situation, without a repayment plan, or unsure that your plan will meet the debt come the redemption date, then you should contact your lender or a mortgage broker as soon as possible to find out what your options could be.
There are some, but not all, lenders who are open to switching a capital repayment plan to an interest-only mortgage. Those that are amenable to changing your method of payment will want to ensure that you have a suitable repayment plan in place – either via an ISA or an Endowment Policy, or selling the property – to enable you to settle the mortgage at the end of the term.
Yes, switching from an interest-only plan to a capital repayment plan within the lifetime of the mortgage is entirely possible, and most lenders are open to this. You should also be aware that it is possible to arrange your mortgage to be on a ‘part-and-part’ basis, where a portion of the mortgage is interest-only and the remainder operates as a repayment plan – this is often dependent on how much equity is already in the property. This has proved useful to people who have had an investment repayment vehicle in place that looks unlikely to cover the full remaining amount of the loan when it comes to term.