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Buy to Let Repayment Mortgage

Is a repayment mortgage for a buy to let a good idea? Find out here.

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By Pete Mugleston  | Mortgage Advisor Pete has been a mortgage advisor for over 10 years, and is regularly cited in both trade and national press.

Updated: 25th June 2019 *

I’m looking to purchase  a buy to let, should I get a repayment home loan?

The team of experts we work with receive many enquiries each day from potential first time or professional landlords, who for various reasons have found it difficult to obtain a buy to let mortgage.

This may be for any number of reasons, however one of the more common rejections we hear is that these landlords have been refused a buy to let repayment mortgage or what is sometimes referred to as a buy to let repayment home loan.

In this article we’ll cover a range of topics including:

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Introduction

The buy to let market has undergone some significant changes over the past few years, with the introduction of a higher rate of stamp duty payable for buy to let and second home purchases and, more recently, the withdrawal of the tax relief on mortgage interest that landlords were benefiting from.

However the above changes have led to many landlords starting their own Ltd companies to enable them to build up a rental portfolio.

This coupled with low savings rates, has led to the buy to let market steadily rising in popularity and we are seeing an increase in our customers asking if their buy to let can be arranged on a repayment basis.

Typically a buy to let is arranged with an interest only mortgage in place, however some landlords prefer a buy to let mortgage on a capital repayment basis and this is an area that the team of experts we work with can offer assistance in.

There are many options available within the mortgage market, and to ensure you obtain the best buy to let repayment mortgage for your individual circumstances, you need an expert with experience and knowledge in this field and the good news is that the experts we work with are ready to help.

What is a buy to let capital repayment mortgage?

Capital repayment mortgages and buy to let interest only mortgages are two separate entities so it is appropriate and useful to have them individually defined, as you will find below.

A repayment mortgage means that the regular payments you are making are reducing the amount of capital you owe.

For instance, if you have a £200,000 mortgage 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.

Interest only means that at the end of the 25 year term, you will still owe the full £200,000. This can also be applied to all mortgages not just on buy to let properties.

Advantages of a repayment buy to let mortgage:

  • At the end of the chosen mortgage term the property is owned outright, also known as unencumbered and no capital is left outstanding.
  • As a portion of the capital is being repaid each month and the balance owed slowly decreases, the doors open for more competitive interest rates as the term progresses.
  • In the later years of a capital repayment mortgage the monthly commitment represents more capital and less interest, meaning overall less interest is repaid.

Disadvantages of a repayment buy to let mortgage

  • As the capital is guaranteed to be repaid at the end of the term the downsides of having a repayment mortgage are few, however there are some to consider:
  •  The monthly commitment is higher when compared to interest only so extra steps need to be taken to ensure affordability.
  • Due to the increased monthly commitment many high street lenders are wary of repayment buy to let mortgages and accessibility to these mortgages may require a specialist mortgage lender.  Fortunately, the team of experts at Online Mortgage Advisor have access to these lenders and will be able to help.
  • As outgoings are higher, some lenders offer smaller maximum loan amounts.

Should I take out an interest only or a repayment buy to let mortgage?

We get many landlords asking if a buy to let mortgage should be interest only or repayment and the answer isn’t a clear yes or no, your unique circumstances and investment objectives will determine which route is right for you.

Certainly in recent times we have seen more and more landlords move towards interest only and the reasons for this are primarily because the monthly mortgage commitment is lower and secondly, because this lower payment is viewed as a safety cushion when the property isn’t let.

Interest only mortgages have their disadvantages though and require serious consideration as to how the capital will be repaid at the end of the term.  As you will see in the example below, if left to run their full term interest only mortgage do result in a higher amount of interest repaid versus a repayment mortgage.

Hypothetical example:

If you had a mortgage for £160k @ 4% if over 25 years –

The interest only monthly repayments would be £533.33 – with interest to pay of £159,999 – and a capital of £160,000 (Total £319,999)

And a repayment mortgage would have monthly repayments of £844.54 – with a total to pay £253,362

Monthly Repayments Interest Paid Total Repayment
Interest Only £533.33 £159,999 £319,999
Repayment £844.54 £93,362 £253,362

The above is for cost comparison purposes only – please check with your lender or talk to one of the advisors we work with today for the most up to date information.

As you can clearly see the repayment mortgage works out cheaper overall, but it has a significantly higher monthly repayment.

As far as a buy to let property is concerned, there may be good reasons to opt for the interest only or repayment route. Talk to one of the advisors we work with for the best advice on which option suits your circumstances.

How much Stamp Duty could I expect to pay on a BTL

Stamp duty is a tax paid on the purchase of a property in the UK, however recent changes have been introduced that affect buy to let properties and second homes. This means that from April 2016, the following higher stamp duty rates now apply:

  • Properties up to £125k – 3%
  • £125k - £250k – 5%
  • £250k+ - 8%

These figures are based on recent information published by HMRC and are only accurate at the time of writing. The experts we work with can advise you on any recent changes that may have occurred.

Eligibility for a repayment buy to let mortgage

The eligibility for a Buy to Let repayment mortgages tend to be more stringent than a standard mortgage, so this is where the team of experts we work with can offer the right advice. They’re specialists in buy to let and can help you get the right mortgage to suit your circumstances.

There are a number of factors that will affect your choice of a buy to let repayment mortgage, and which lender may approve you, including:

  • Personal income & affordability
  • Credit history
  • Property type
  • Employment
  • Personal circumstances

Buy to let repayment mortgage deals – who has the best rates?

Much depends on how much the client is prepared to put forward with regards to LTV (loan to value) – some will entertain an 80 or 85% LTV, while a few would consider 90% LTV.

Some customers require a buy to let repayment mortgage with no early repayment charge or fee, which allows some flexibility should their circumstances change and because we work with ‘whole of market’ buy to let experts, this is an area we can help with.

The most important thing to remember is that the best deal in the market is only really available to a select few individuals who meet all of the lending criteria. For the masses who don’t, getting the best rate can be difficult given the sheer number of lenders and products in the market.

In order to find the best deal, it is always recommended that you make an enquiry and speak to one of the experts we work with to get the right advice to suit you.

Top Slicing – using your personal income to borrow more on a buy to let

As discussed above, a buy to let repayment mortgage application is assessed by looking at the proposed rental income, however there are some lenders that will consider using the borrower’s personal earned income if there is a shortfall in the amount needed by the borrower.

This is predominantly aimed at higher income earners, but can be a useful tool if there is a shortfall in the rent and is referred to as top slicing.

If we refer back to the previous example, lender A will not allow any top slicing however lender B, whose income coverage ratio (ICR) is higher will allow the use of personal income, which could mean a lower rental income could still be used, thus offering a higher maximum loan amount.

Other lenders will use an affordability assessment to create a tailored approach to each individual’s circumstances.

Buy to let mortgage early repayment charges

Unlike many buy to let mortgages, there are a few that don’t have early repayment charges.

These are perfect if you want to sell the property without paying a fee, for instance, sold on as a tenanted property or sold as a buy to let after restoration or building work has been completed.

Ask one of the expert advisors we work with about the best options.

How does having bad credit affect your buy to let repayment mortgage

There are lots of landlords who have experienced bad credit problems in the past, but have successfully obtained a buy to let repayment mortgage through the expert advisors that we work with.

Your choice of mortgage will depend on the type of issues on your record such as:

  • Adverse credit overview
  • Low credit score
  • Mortgage Arrears
  • Defaults
  • County Court Judgements (CCJs)
  • Individual Voluntary Arrangements (IVAs)
  • Debt Management Plans (DMPs)
  • Bankruptcy
  • Repossession

Your choice of mortgage will depend on the type of issues on your record and how long ago they happened.

Talk to an expert buy to let advisor

The team of experts we work with, help first time and existing landlords take out buy to let repayment mortgages on a regular basis, their knowledge and experience will give you confidence that they will get you the best mortgage available based upon your unique circumstances.

If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0808 189 2301 or make an enquiry here.

Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances.  – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.

Updated: 25th June 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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