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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: 24th June 2020*

Whether you’re a potential first-time or professional landlord, you may have found it difficult to obtain a buy-to-let mortgage for various reasons.

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 be looking at the difference between repayment and interest-only buy-to-let, which is best for you, and how to get the right advice for your circumstances.

Click a link below or read on for a comprehensive overview:

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

Capital repayment mortgages and buy-to-let interest-only mortgages are two separate products. A repayment mortgage is where your regular payments are reducing the amount of capital you owe, whereas an interest-only means that you’ll only have to pay the interest until you reach the end of your term, where the capital will need to be repaid in full.

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 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 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 RepaymentsInterest PaidTotal 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, some lenders 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: 24th June 2020
OnlineMortgageAdvisor 2020 ©

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.