If you are thinking about taking out a mortgage for a Buy to Let property, one of the choices you will have is whether your loan is on a repayment or interest-only basis. There are pros and cons to both options, and we will explore these to help you to decide which is more suitable for your needs.
What is a repayment Buy to Let mortgage?
A repayment Buy to Let mortgage is a loan to purchase a property to rent out where the monthly payments include both the capital and interest. For example, taking out a £250,000 Buy to Let repayment mortgage would involve paying back the capital of £250,000 plus the interest. At the end of the mortgage term, you would own the property outright.
What is an interest-only Buy to Let mortgage?
An interest-only Buy to Let mortgage is a loan where only the interest is repaid and at the end of the mortgage term, the capital is still outstanding. The loan must be repaid at the end of the term using funds from selling the property, savings or using an alternative type of refinance for a new mortgage.
Key differences between the two options
These are the main differences between repayment and interest-only Buy to Let mortgages:
Monthly payment amount - It is common for landlords to choose an interest-only Buy to Let mortgage to minimise the monthly repayments in order to achieve a higher cash flow, as the payments are considerably lower.
Ownership – With a repayment mortgage, the landlord will own the property by the end of the mortgage term but with interest-only, the full capital will need to be repaid at this point or beforehand.
Mortgage costs – The overall cost of the mortgage is usually lower on repayment mortgages, as you are paying interest on a reducing loan amount rather than the full loan amount.
