Interest-Only Buy-to-Let Mortgages

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Home Buy To Let Mortgages Interest-Only Buy-to-Let Mortgages
Pete Mugleston

Author: Pete Mugleston

Mortgage Advisor, MD

Jon Nixon

Reviewer: Jon Nixon

Director of Distribution

Updated: March 15, 2024

How we reviewed this article:

Our experts continuously monitor changes in the financial space and work closely with qualified mortgage advisors for factual verification.

March 15, 2024

If you’re a landlord looking to take on an investment property or rent out a home you already own, you are likely weighing up the kind of buy-to-let mortgage to take on: repayment or interest only.

Your long-term intentions and immediate circumstances will determine what you decide to do, however it’s worth noting the differences of the two, and why it’s more commonplace for buy-to-let mortgages to be interest only products. Here we look in more detail to help you move forward.

Are all buy-to-let mortgages interest only?

Buy-to-let mortgages are typically interest-only, lowering monthly costs by covering just the interest. While repayment mortgages exist, they’re rare. Landlords usually settle the principal by selling or refinancing at the mortgage’s end. This approach can offer tax benefits and suit long-term investment strategies.

Most lenders who provide buy-to-let mortgages offer both repayment and interest-only options, however, there are a handful who will not sanction repayment mortgages at all.

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Why choose interest only over repayment?

If you’re a landlord and are looking at mortgage options, there are a variety of reasons you might want to choose an interest only loan rather than a repayment.

Let’s look in closer detail here at why that is:

Lower monthly payments

The strength of your application, and a major factor in whether you’ll be successful in securing a buy-to-let (BTL) mortgage in the first place, will depend on whether your buy-to-let property will generate a larger monthly income than the amount you have to pay back to the bank. On average, lenders tend to insist that the rent you’ll receive should be at least 125% of the mortgage payment, which may be stress tested at a higher interest rate, although some might be as high as 145%.

Long-term property investment

If your main ambition as a landlord is to reap the rewards of owning a BTL property further down the line, when you expect house prices will have risen considerably, this might negate the fact that the full cost of your loan will still be the same at the end of your mortgage term, and you won’t have paid anything off the capital at all.

You may be looking to make a small profit each month from the rental income, then make a more dramatic windfall when it comes to selling the property years down the line. It’s worth remembering that you are at the mercy of the housing market with this move, and you will also have paid a lot more interest over the full term than you would if it had been calculated on how much capital you’ve continuously repaid, however many landlords do their sums and approach this decision as a long-term business venture, often with attractive gains and an investment that pays off.

Short-term safety net

Because buy-to-let isn’t always a sure thing, there may be periods where your property is empty and not making any money in rent at all. A buy-to-let interest only mortgage helps to offset this risk to a degree, because your monthly payments to the lender are lower, therefore you are not having to find the funds for a higher repayment mortgage each month that you are out of pocket.

Get a clearer idea of what to expect financially with our buy-to-let calculator.

Buy-to-Let Mortgage Calculator

Our buy-to-let mortgage calculator can show you how much your mortgage could cost you each month and overall. Simply enter the rental property value, deposit, anticipated monthly rent, interest rate, mortgage term and our calculator will do the rest.

Enter the value of the rental property here
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A deposit of at least 20% is usually required for a buy-to-let mortgage
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Most lenders will require a deposit of at least 20%
Deposit must be less than the property value
Enter the anticipated monthly rent here
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Enter the mortgage rate, 5.5% is a typical rate currently but this can vary
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Enter the mortgage term, 25 years is the average but lenders can offer shorter and longer terms
years
Borrowing

Loan to Value ratio (LTV):

Most lenders won't offer buy-to-let mortgages over a LTV of 80%.

Interest Cover Ratio (ICR):

Most lenders require rental income to be at least 125%-145% of the interest repayments for a buy-to-let mortgage.

Get started with a specialist buy-to-let broker to find out how much they could help you save on your monthly mortgage repayments.

What interest rates to expect

The table below provides an indication of the interest rates currently available for buy-to-let mortgages.

Lender Product Details
Frosted Rates Image

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Last updated May 2024

The rates quoted above were correct at the time of writing and are subject to change at the lender’s discretion. Speaking to a mortgage broker is the best way to keep track of the rates available at any given time.

The interest rates for repayment buy-to-let mortgages are largely the same, but remember that the amount of interest you’re paying will decrease if you’re on a repayment but it won’t if you’re on an interest-only. This is because the capital you’ll pay interest on will reduce over time with a repayment, but will remain at the full amount with interest-only, so over time your accrued gross interest will be higher.

How can a broker help you choose the right mortgage?

Because the BTL mortgage marketplace is not linear or always transparent, and neither are the circumstances of the applicant, it can be difficult to navigate without the support of a specialist mortgage broker.

An experienced and impartial broker, like the ones we work with, will understand your unique situation and intentions, whether it’s simply letting out a single investment property for your future or an ambition to forge a portfolio landlord career. Once they have a full picture, they can then offer guidance on which is the right kind of mortgage for you, and what the implications are.

They can then go forward to identify suitable lenders, provide practical advice on putting together a strong application, and ultimately they will negotiate a deal on your behalf.

If you get in touch, we’ll arrange for a buy-to-let specialist to contact you directly.

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Eligibility criteria and deposit requirements

You’ll likely find that an interest only BTL mortgage garners the same requirements as any kind of buy-to-let mortgage criteria, and most lenders expect landlords to prefer this option anyway. That said, as with all kinds of borrowing criteria, there are hurdles to jump in order to get a mortgage approved.

This includes demonstrating your expected rental income, which we have already touched upon, what your affordability is like (income and outgoings), how old you are and your historical financial behaviour. If you have adverse credit issues, there are specialist bad credit brokers out there who can help you with this.

When it comes to the deposit you’ll need, it’s likely that you will be looking at a maximum 75-80% loan-to-value ratio, as is standard for buy-to-let mortgages, so you will need to put down between 20-25% deposit.

Get matched with a buy-to-let mortgage broker

Our network of specialist and handpicked brokers contains some of the country’s most experienced and successful buy-to-let advisors. They have access to otherwise closed-off corners of the market and exclusive deals, and are highly skilled at offering advice and guidance to would-be or professional landlords.

Getting help in this area can be the difference between success and failure, and we can start providing that helping hand today, with a free initial consultation. Contact us today on 0808 189 2301 or make an online enquiry to get under way.

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FAQs

Yes, this is possible. You can approach your current lender or shop around for one that offers a better rate. If you’re in the middle of a fixed-term mortgage however, you may have to pay a penalty for leaving early. Read more about remortgaging a buy-to-let.

It is certainly harder to get a mortgage in these circumstances, and many lenders won’t even give you the option. That said, there are a good number who will consider your application, but they often come with stipulations, such as that a first-time buyer must be purchasing a property with an experienced landlord or that you must earn a certain minimum income.

At the end of your term, the repayment vehicle you’ve chosen will now be needed to repay the original capital amount borrowed in full. It’s best to monitor your repayment strategy throughout the term to ensure it’s on track to do this during the term. If not, you should speak to your lender and revise the strategy to ensure full repayment can be made. They will be able to outline all of the options available to you.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for Online Mortgage Advisor of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

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