Buy-To-Let Repayment Mortgages Explained

Getting the right mortgage is a key part of your property investment strategy. This article’ll look at buy-to-let repayment mortgages and how they compare with interest-only.

What is a buy-to-let capital repayment mortgage?

A repayment mortgage allows you to borrow money to buy a property and pay back that sum, plus interest, over many years. You’ll make monthly payments that are part interest and part capital repayment. You’ll own the property in full at the end of the mortgage term.

The alternative is an interest-only mortgage. This is another way to borrow money to buy a property, where you’ll only pay the interest accrued each month. Your monthly payments will not reduce the loan amount. At the end of the mortgage term, you’ll still owe that amount and need another way to repay it (usually either by selling the property or remortgaging).

Differences between capital repayment and interest-only mortgages

Both types of mortgages can be used to buy a buy-to-let property, and both have monthly payments.

Repayment mortgages:

• Have higher monthly payments
• Allow you to slowly grow your percentage of equity in the property
• Leave you mortgage-free at the end of the term

Interest-only mortgages:

• Have lower monthly payments
• Maintain your share of equity in the property
• Must be repaid in full at the end of the term

For example, with a repayment mortgage, if you took out a £200,000 loan at 4% over 25 years, by the 20th year, you will only owe £57,304, and by the end of the term, you will owe nothing at all. With an interest-only loan, however, you will still owe the full £200,000 at the end of the 25-year term. This can also be applied to all mortgages, not just buy-to-let properties.

Advantages and disadvantages compared with interest-only

While most landlords opt for an interest-only mortgage, it’s wise to consider all your options. In some circumstances, a repayment buy-to-let mortgage might be the best solution for new landlords.

Advantages

• You’ll pay less interest over the loan term (as the loan size gets smaller and smaller).
• When the term is up, you will own the property outright. So, if you choose to keep it, more of your rental income will be profit.
• You’ll also have other options, such as cashing it in for a lump sum or borrowing against it to expand your property portfolio.

Disadvantages

• The monthly repayments are usually higher than those of an interest-only mortgage. This can restrict your borrowing capacity if you can’t meet the lender’s affordability criteria. You can use the calculator in this article to see the difference in repayments.
• During any periods when the property is empty, the higher repayments can be a greater drain on your resources.
• You will have less liquidity, which can adversely affect your ability to cover repair and maintenance costs or invest in other properties.
• Your choice of lenders might be limited, which can mean the rates are higher.

Repayment comparison

The table below shows the comparison between borrowing on repayment or interest-only terms:

*The rates quoted below are for illustration purposes only. For an accurate, up-to-date comparison, please make an enquiry, and a buy-to-let mortgage broker will contact you straight away*

As you can see from the table above, the monthly payments and total repayable differ significantly depending on the type of mortgage you choose. Which is right for you depends on your circumstances and investment plans, which might change over time.

Calculate your mortgage payments

Our calculator below can give you an idea of your repayments. Simply input some basic details about the rental property you’re looking to buy, and the calculator will do the rest.

This tool gives you the option to compare results for repayment buy-to-let mortgages with interest-only agreements.

Can you switch from an interest-only buy-to-let to a repayment?

Yes. Many landlords initially choose an interest-only mortgage to keep their monthly repayments low and maximise the return on their investment in the early years. However, many also wish to start paying down their loan at some stage, perhaps in preparation for retirement. At this point, it’s wise to shop around for the best repayment mortgage rates.

How to get a buy-to-let repayment mortgage

Specialist lending areas like this can be tricky to navigate without expert help. That’s because fewer products are available than in mainstream mortgage markets, and each lender has unique (and sometimes strict) lending criteria. If you need to speak to a broker specialising in buy-to-let repayment mortgages, get in touch.

Your broker will guide you through the following process:

Step 1: Confirm that a repayment mortgage is right for you. They’ll discuss the advantages and disadvantages we’ve mentioned and how they apply to your situation, and they’ll conduct the calculations to show you the difference in costs.

Step 2: Finding the right lender. They’ll know exactly which lenders offer repayment mortgages on buy-to-let properties and the eligibility criteria for each. You won’t necessarily meet the criteria for all lenders, but your broker will identify which is the best fit.

Step 3: Submit your application. For various reasons, buy-to-let mortgage applications can be more difficult to prepare than residential mortgage applications. You’ll need to make rental income forecasts, for example. Your broker will know what lenders need to see and can help you with the details.

Eligibility Criteria

Eligibility varies between lenders and is quite strict for buy-to-let repayment mortgages, so it’s important to identify the lender most suitable for your circumstances and tailor your application to their risk profile.

Criteria typically include:

• Homeowner status – In many cases, you can only get a buy-to-let mortgage if you are already a homeowner (this is changing with an increasing number of lenders)
• Rental income – Depending on the lender, this will typically need to be between 125% – 140% of your mortgage payments, particularly for a repayment mortgage, as they will be higher than interest-only
• Personal finances – most lenders will want to assess your income and expenditure along with your credit file
• Age – Most lenders have age caps as part of their criteria.
• Loan to value – Each lender has their maximum loan-to-value percentage. This is generally between 60% – 80% for buy-to-let repayment mortgages
• Property type – Providers usually prefer to lend on standard constructions made of bricks and mortar.
• Location – Some lenders do not approve repayment buy to let mortgages for ex-pats.

For more information, check out our buy-to-let eligibility criteria page.

Which lenders offer this type of mortgage?

Buy-to-let repayment mortgages are available from mainstream lenders, such as Barclays, HSBC, and NatWest, and specialist lenders, such as Keystone Property Finance and Accord Mortgages. Your broker will help you decide which is best for you.

The rates table below gives you an idea of the interest rates currently available for this type of buy-to-let mortgage.

Please note that the above rates were accurate at the time of writing, but are always subject to change at the lender’s discretion. Speaking to a mortgage broker is the best way to find the most up-to-date deals.

Can you get a buy to let mortgage with no early repayment charges?

It’s possible, but you will usually pay higher rates and admin fees. But there are some circumstances in which it’s worth paying a little over the odds for the long-term benefits:

• If you anticipate letting it for a relatively short period before selling at a profit.
• If you plan to let it out for a limited time before living there yourself and converting to a standard residential mortgage.
• If you’re looking to carry out a development project and then remortgage based on the new valuation.
• If flexibility to remortgage and raise funds to expand your portfolio is important to you.
• If you plan to use other assets to pay down the mortgage on this property quickly.

Get matched with an expert buy to let repayment mortgage advisor

If you’re considering a repayment buy-to-let mortgage, you must speak to an expert. Our unique broker matching service will assess your plans for your buy-to-let property and put you in touch with the right broker for your needs. Call today on 0330 818 7026 or enquire online to get matched with your ideal broker.