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Interest-Only Buy-to-Let Mortgages

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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: 28th October 2019 *

With mortgage lenders expecting monthly rental prices on buy-to-let properties to be higher than the borrower’s mortgage, many are looking at cheaper ways to pay back their loans. 

In this article, we look at how interest-only repayments for a buy-to-let (BTL) mortgage can help bring monthly costs down, and if an interest-only is the best repayment option for your circumstances. 

We’ll also be looking at:  

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What is an interest-only buy-to-let mortgage?

A buy-to-let is the mortgage for a property you rent out, and interest-only is the repayment type on which the buy-to-let is arranged.

With an interest-only buy-to-let mortgage, you’ll only have to repay the interest on the loan amount each month throughout your term. However, you will have to pay the loan amount back at the end of your term

Because buy-to-let and interest-only are two separate entities, you could have a buy-to-let mortgage where you repay the loan plus interest each month, and interest-only plans are also available for residential and commercial properties. 

Is interest only a good idea for buy-to-let?

An interest-only mortgage is one of the cheapest forms of borrowing and often attractive to buy-to-let investors. The reason for this is that each month you are only covering the interest the debt is incurring, therefore the amount you owe remains the same and does not decrease as a repayment mortgage would.

Let's take a closer look at the advantages and disadvantages...

Advantages & disadvantages of interest-only buy-to-let mortgages 

The other benefits of interest-only repayments for a buy-to-let include:

  • The monthly mortgage commitment is lower
  • The lower payment each month can be viewed as a safety cushion for times when the property isn’t let
  • Positive tax implications as you can offset interest paid on the mortgage against the rental income, which could result in reducing your personal income tax bill. However, this will be changing from April 2020.

There are, however, a few disadvantages of an interest only mortgage. These include: 

  • The amount of capital you originally borrowed will not decrease
  • If you are using the sale of this property to repay the debt, you may leave yourself exposed to the volatile housing market. This can cause problems if you have to sell the property for less than its original value.
  • If left to run its full term, you could end up repaying back more interest in total when compared to a repayment mortgage, where interest is usually recalculated on a constantly reducing balance.

For the right advice, speak with an advisor

Am I eligible for an interest-only buy-to-let mortgage?

Interest-only buy to let mortgages can be seen by lenders as a higher risk than a traditional residential mortgage, therefore the eligibility for these mortgages can be more stringent.  

There are some restrictions that are common amongst most lenders that need to be factored in however, these are:

  • Interest-only buy to let mortgages are not usually offered to first-time buyers, though there may be some mortgage lenders willing to do so. 
  • Some lenders will limit the amount of buy-to-let mortgages held across their group of lenders from 3 to a maximum of 5, which can hinder portfolio building (although there are portfolio specialists).
  • There is often a minimum age restriction of 21, however, some may consider applicants at 18.
  • A significant deposit, often 25% is needed (although some lenders can consider a minimum of 15%). This will be discussed in further detail.

While the above points are specific to a buy-to-let interest-only mortgage, there are a number of factors that could impact your choice of mortgage. These include:

Personal income and affordability

Many buy-to-let mortgage providers now prefer to see evidence of your personal income as well as the potential income of the rental property. While some lenders assess your affordability on a case-by-case basis, there are many who prefer to multiply your personal income to calculate your lending amount. 

4 to 4.5 times your salary is preferred by many, though some may be able to offer you a higher multiple. 

Credit rating

You may be able to get an interest-only buy-to-let mortgage if you have poor credit, though this all depends on the type of adverse you have, the date in which it occurred, and how long you have left to pay it off, if you haven’t done so already. 

Speak with an advisor to see how your credit rating could affect your application. 

Property type

Many lenders take the type of property you’re looking to buy before they can agree to give you a loan. This is because there are some property types that are easier to rent out than others. 

If the property type is classed as a non-standard construction, you may have a harder time letting it out. 

Your employment type

If you have a standard full-time job, your changes of getting approved for a mortgage are higher compared with a self-employed individual. However, this doesn’t mean that getting an interest-only help-to-buy mortgage is impossible if you’re self employed – speak to an expert to discuss your options.

How much can I borrow with an interest-only BTL?

It depends on your income, rental predictions, deposit amount, property type and credit history.

Lenders will assess your buy-to-let interest-only mortgage application to see if it’s a viable investment for them based on the rental yield, which is the amount charged per calendar month for rent must be higher than the monthly mortgage commitment. 

Traditionally, lenders would require that the rental yield be 125% of the mortgage payment at a typical rate of 5%. 

For example, a £100k mortgage with a rate of 5% would cost you £417 per month, stressed at 125% = £521 per month. Therefore the rental charged per month must exceed £521 for this investment to be viable

The potential rental income charged will also be confirmed once the property is valued.

However, due to increasing costs to landlords, some lenders are increasing the amount required and introducing different income coverage ratios (ICR).

For example, assuming the same £100k mortgage is required:

  • Lender A will require a rental income of £573, which has an ICR of 5.5% stressed at 125%.
  • Lender B will require a rental income of £642, which has an ICR of 5.5% stressed at 140%.

As you can see, the difference between two lenders is substantial and can be the deciding point, though the best way to address this is to find lenders who would require a lower rental income coverage ratio from you. 

Make an enquiry to get started. 

Using your personal income to borrow more on a buy-to-let

As discussed above, a buy-to-let, interest-only 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.

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

What deposit amount can I put down?

Most lenders will require a substantial deposit on an interest-only buy-to-let mortgage due to the higher risk they present. 

At present, this is typically 25%, so a 75% loan-to-value (LTV) is required.

There are some lenders who may be willing to stretch to 80% LTV, though these are typically offered to individuals with previous renting experience. 

The experts we work with can advise you on what deposit will be required for your buy-to-let interest-only mortgage based on your circumstances. Make an enquiry and we’ll match you with someone shortly. 

Interest-only or repayment: which type is best for buy-to-let?

There are pros and cons to both interest-only and repayment methods. The repayment mortgage means that the debt is cleared after the agreed mortgage term, which is typically 25 years. 

However, with an interest-only mortgage, the costs are split in two: you’ll still have the capital to pay at the end of the loan period, though your monthly bills will be cheaper. 

Cost comparison

If you had a mortgage for £160,000 with an interest rate of 4%, the costs would work out as follows:

Total cost Interest Paid Interest Paid Repayments
Repayment £252,316 £92,316 £841.05
Interest-Only £326,175 £166,175 £553.92

In this example the repayment mortgage works out cheaper overall, but 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 route. Make an enquiry to speak with one of the advisors we work with for the best advice on which option suits your circumstances.

Strategy for paying back the interest 

If you opt for a buy-to-let interest-only option, then you’ll need a strategy to pay the capital when it comes due. Most mortgage lenders will expect to see a repayment strategy before they can consider lending. 

These could include:

  • Selling the property at the end of the loan period 
  • An ISA into which you make regular payments to cover the capital
  • Shares and stocks 
  • Remortgaging into a standard or another interest only loan

An expert mortgage advisor can discuss the best repayment options for your buy-to-let mortgage. Make an enquiry to get started. 

What are the best rates for BTL interest-only mortgage? 

The rates for an interest-only mortgage vary from lender to lender, which is why we work with ‘whole-of-market’ mortgage advisors who have access to the best buy-to-let, interest-only mortgages in the UK.

Some of the main high street names such as Lloyds, Halifax, TSB, HSBC and Coventry Building Society offer interest-only buy-to-let and repayment mortgages, as well as numerous specialist lenders.

Much depends on how much they are prepared to pay in regards to LTV (loan to value) – some will entertain an 80 or 85% LTV, while a few would consider 90% LTV.

It’s also worth mentioning rate types here, as lenders have a range of products on offer to suit each borrower’s requirements, and some offer different terms if you opt for an interest-only buy-to-let mortgage on a 5-year fixed rate.

The most important thing to remember is that the best deal in the market is really only 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 to get the right advice to suit you.

How is tax treated for this type of mortgage?

There have been some significant changes in how landlords are taxed with buy-to-let mortgages. In the 2015 Summer Budget, it was announced that the amount of tax relief you could claim would be restricted and rolled out plans up to 2020, which we discuss below. 

Personal income tax relief

Historically, landlords would declare the income earned on rental properties after mortgage interest and expenses had been deducted to reduce their personal tax bill. 

However, in April 2017 changes were introduced and by April 2020, mortgage interest and expenses can no longer be deducted and is to be replaced with a tax credit. 

By April 2020 all rental income will be taxable, though landlords will receive a 20% tax credit, which is based on your mortgage interest payments

Stamp duty increase 

Stamp duty is a tax paid on the purchase of a property in the UK, however, changes were introduced that affect buy-to-let properties and second homes. 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 information published by HMRC and were accurate at the time of writing. The experts we work with can advise you on any recent changes that may have occurred.

Make an enquiry to find out more.

Speak to an expert

The mortgage brokers we work with have extensive knowledge of the buy-to-let market, and can offer you advice on interest-only repayments as well as explore the market to find you the best deals. 

Make an enquiry and we’ll match you with an expert shortly. 

Updated: 28th October 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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