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Buy To Let Repayment Mortgages
In this guide
In this guide, we will take a closer look at buy-to-let repayment mortgages and we will compare them to the interest-only alternatives.
Which type of mortgage is right for you? This guide might give you the answer but if you would like a detailed discussion about your options, get in touch with a member of our team who will be very happy to help you.
What is a buy to let capital repayment mortgage?
A buy-to-let capital repayment mortgage is a loan used to buy an investment property. With this type of mortgage, your monthly payments consist of both the interest and the loan capital. By the end of the mortgage term, you will have paid off all of your loans if you have kept up with your repayments.
Knowing that your mortgage will be paid off at the end of the loan term can give you great peace of mind, which is just one of the benefits of this type of mortgage.
How is this different to a buy to let interest-only mortgage?
With an interest-only buy-to-let mortgage, you pay only the interest each month and not the loan capital. While this can provide you with lower monthly payments, you will still have to repay the capital when the mortgage term ends.
Your mortgage lender will expect you to have a repayment plan in place before they offer this type of mortgage, so this is something you need to consider. If your repayment plan fails and if house prices fall, you could be out of pocket at the close of the mortgage term.
Advantages and disadvantages of a repayment mortgage compared with interest-only
Interest-only mortgages are the popular choice for most buy-to-let landlords as the lower monthly repayments allow them to have a better cash flow each month. They then have more money to spend on their investment properties or anything else related to their business or personal life.
But as attractive as this might seem, landlords still need to raise funds to pay off all the capital when the mortgage term ends. This isn’t something they would need to worry about if they opted for a repayment mortgage.
This is just one advantage attributed to repayment mortgages when comparing them to interest-only mortgages but there are others. But as you can see below, there are also a few disadvantages associated with repayment mortgages.
Advantages of repayment buy to let mortgages
Repayment mortgages are less expensive overall because you will typically pay less interest than you would on an interest-only mortgage.
With a smaller outstanding balance later on in the loan term, you may be able to access a new loan with a lower interest rate if you decide to remortgage.
You won’t need a repayment plan for the loan capital as the entire mortgage will be paid off when the term ends.
After the mortgage term ends, you will own the property outright. With no more loan payments to make, you will be able to make more profit from your rental income. Borrowers with an interest-only mortgage, on the other hand, won’t own the property until they have paid off the capital.
While you could keep hold of your rental property, you also have the option of selling it to raise cash or borrowing against it to expand your investment portfolio.
Disadvantages of repayment buy to let mortgages
Monthly payments are higher than they would be on an interest-only mortgage. This could affect your affordability and borrowing capacity.
Fewer lenders offer buy-to-let repayment mortgages (but we can put you in touch with those that do).
Due to the higher monthly payments, you will have less cash to cover the ongoing costs associated with your rental property, such as maintenance expenses.
Buy to let Repayment vs interest only mortgage comparison
The table below indicates the difference in costs between repayment and interest-only mortgages. As you can see, repayment mortgages work out cheaper but whether or not a repayment mortgage is right for you depends on your investment goals and individual circumstances.
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|Mortgage amount||Repayment mortgage monthly payments||Repayment mortgage total paid over full term||Interest-only mortgage monthly payments||Interest-only total paid over the full term|
The above figures are based on a mortgage interest rate of 5% over a 25 year mortgage term.
Can you switch from an interest-only to a repayment buy-to-let mortgage?
Yes! It’s common for landlords to make the switch to a repayment mortgage once they have equity in their property as they are then able to borrow at lower rates over the repayment term. Another reason for switching is to have the peace of mind that the loan will be paid in full at the end of the mortgage term.
It’s also possible to switch the other way – from a repayment mortgage to an interest-only mortgage deal – if you can convince the lender that you have a repayment vehicle in place to cover the capital at the end of the loan term. Should you take this step, you will free up more cash from your rental income if you need to use it for repair costs or to finance other buy-to-let properties.
Calculate your buy to let mortgage payments
To get an idea of what your mortgage payments might be on both a repayment and interest-only mortgage, input the relevant details, such as the interest rate and how much rent you expect to charge, into the calculator below.
You will notice that your mortgage repayments will be higher on a repayment mortgage but it’s still possible to reduce these with the help of an expert mortgage broker.
Buy-to-Let Mortgage Calculator
The actual monthly payment on your loan will be based on a number of other factors, including your credit history, so the calculated figure can only be considered an estimate.
Another calculator that you may be interested in is our Rental Yield Calculator
How a buy-to-let broker can help
There are many variables to consider when choosing which mortgage type is best, so it’s wise to speak to an experienced mortgage broker who can help you decide which one to go for based on your individual circumstances.
But knowing which mortgage to choose and getting approved for a mortgage is a different matter altogether. Lender requirements for buy-to-let mortgages are stricter than on residential mortgages, so it’s helpful to have someone on your side who can direct you to the lenders more likely to accept your application.
The team at YesCanDo Money are buy-to-let mortgage specialists so we can compare interest-only and repayments mortgages with you to help you know which is right for your situation. We can also help you get a fantastic mortgage deal with the lowest interest rates to reduce your monthly repayments and help you make more of a profit from your property investment.
Would you like to learn more? If so, get in touch with our team using the contact details below.
Speak to a Buy to let expert
Maximise your chances of mortgage approval and getting the best deal on a mortgage by speaking to a buy-to-let expert on our team.
Call us at 033 0088 4407 or get in touch with us via WhatsApp or our contact form to arrange a callback from one of our specialist mortgage advisors.
It’s easier to get a residential mortgage than it is a buy-to-let mortgage as the eligibility criteria set by lenders for landlords are quite strict. Criteria between lenders can vary but generally speaking, the criteria will be based on the following factors.
Lenders require a larger deposit for buy-to-let mortgages than they do on residential mortgages, with most asking for a deposit size of 20-25% of the property value. For a repayment mortgage, you might be asked for an even bigger deposit – possibly up to 40% – to offset any financial risks for the lender.
Homeowners are more likely to get their mortgage approved than those who have never had a residential mortgage.
The amount you can borrow for a buy-to-let mortgage will depend on your expected rental income. Most lenders will require an income figure that’s equivalent to 125%-145% of your mortgage repayments. So, if the payments on your buy-to-let mortgages were £1000 a month, the anticipated monthly rent would need to amount to a figure between £1,250-£1,450.
How much rental income you need to earn on a repayment mortgage will usually be higher than that on an interest-only mortgage, so this is something to consider when comparing mortgages.
As is the case when you applied for your standard residential mortgage (assuming you’re a homeowner), the lender will assess your income, expenditure, and credit history when deciding whether or not to grant you a mortgage approval.
Most lenders set age caps as part of their criteria. The minimum age cap is usually 18-25 and the upper age cap can be 75 or above, depending on the lender.
Each lender has their own preferences on the types of rental property they are willing to finance. Some lenders won’t consider HMO (House of multiple occupancy) properties, for example, and most lenders will be wary of properties made from non-standard construction materials (i.e. anything that isn’t bricks and mortar).
Buy to let repayment mortgage advisor
Frequently Asked Questions
Which lenders offer a buy to let repayment mortgage?
Several High Street lenders offer buy-to-let capital repayment mortgages, including HSBC, Barclays, and Metro Bank. Some lenders, such as Santander, will only accept applications via a mortgage broker, such as ourselves.
There are also niche lenders who offer buy-to-let repayment mortgages, some of whom offer better rates than those on the high street. We can put you in touch with these mortgage lenders if you’re looking to purchase a buy-to-let property, so contact our team for more information.
Can you get a buy-to-let mortgage with no early repayment charges?
It is possible to get a buy-to-let mortgage with no early repayment charges but you might incur higher interest rates and you will likely have to pay more in admin fees.
To be eligible for a buy-to-let deal with no early repayment charge, you will need to meet the lender’s criteria. Usually, this will include the following.
Most lenders will require you to…
Own a residential property (be that outright or with an existing mortgage)
Make a larger deposit (minimum deposit will usually be 25%)
Have an excellent credit rating
Have a minimum earned income of £25,000
Meet their minimum property valuation (house prices worth a minimum of £75,000 are preferred)
Have portfolios up to £5 million
Can I pay off a buy-to-let mortgage early?
If you want to own your property outright sooner rather than later, you can pay off your buy-to-let mortgage early, either by paying a lump sum to clear the loan or by making overpayments on your mortgage balance.
Early repayment charges may be imposed if you pay off your mortgage early but you can avoid these if you don’t overpay more than 10% of your balance per year.
How much of a down payment do I need for a buy-to-let mortgage?
The minimum down payment required for buy-to-let mortgage deals is usually 25% of the rental property value. However, it can vary between 20%-40%, depending on the leader, mortgage type, and the size of mortgage needed for your buy-to-let investment.
Can I still get tax relief on my buy-to-let mortgage?
You can get tax relief on your buy-to-let mortgage but due to the regulations that were passed in April 2020, you can no longer deduct mortgage expenses from your rental income.
However, under the new system, you can receive tax credit based on 20% of the interest element on your mortgage. This might be more relevant to you if you have taken out a mortgage on an interest-only basis rather than a repayment mortgage.
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