What Is A Buy-To-Let Repayment Mortgage?

Nikka Sulton

What Is A Buy-To-Let Repayment Mortgage?

Securing approval for a buy to let mortgage can be challenging due to the array of available options. Additionally, you must select the appropriate mortgage type for your buy to let property, considering options like repayment mortgages instead of interest-only deals.

Although interest-only mortgages are prevalent in the buy to let sector, repayment mortgages offer their own benefits. Your choice typically hinges on your investment objectives. This guide will assist you in evaluating your options before reaching a decision.

What is a buy-to-let repayment mortgage?

Why would landlords want a repayment mortgage?

Buy to let repayment mortgages are favoured by those aiming to augment their retirement income.

If you fully own a buy to let property, the rental income becomes entirely yours. Additionally, selling the property near the mortgage term’s conclusion often results in a capital gain.

There’s also the possibility to transition from an interest-only to a repayment mortgage. This transition could offer a lasting investment that you could pass down to your children.

Advantages of a buy-to-let repayment mortgage

Property ownership in full upon mortgage term completion
Gradual reduction in mortgage interest
Lower interest payments in comparison to interest-only mortgages
No requirement for a repayment vehicle or exit strategy
Suitable for generating income in later years
Property inheritance for children or next of kin is feasible

Disadvantages of a buy-to-let repayment mortgage

Stricter affordability assessments are common
Monthly repayments may surpass those of interest-only mortgages
Limited availability of buy to let repayment mortgages
Challenges in obtaining substantial mortgages due to affordability

Repayment mortgages, involving both capital and interest payments, often lead to higher monthly outlays. Consequently, affordability assessments can pose challenges, particularly for securing larger mortgages.

Should I choose an interest-only or a buy to let repayment mortgage?

Interest-only mortgages dominate the buy to let landscape, yet your choice between repayment or interest-only hinges on your investment objectives.

An interest-only mortgage can offer improved monthly cash flow, especially in the early mortgage stages, as repayment mortgages often leave minimal monthly cash surplus.

Repayment mortgages typically translate into lower overall costs, given the gradual reduction in both capital and interest as you clear the balance monthly.

With an interest-only mortgage, you must plan for a repayment vehicle or exit strategy. This is vital because, at the mortgage term’s end, you’ll still owe the full capital amount to the lender. It’s a notable drawback associated with interest-only mortgages.

Does having bad credit affect a buy to let repayment mortgage?

Credit problems can impact your mortgage prospects. However, it’s still feasible to secure a buy to let repayment mortgage even with the following credit challenges:

County Court Judgements (CCJs)
Late payments and arrears
Bankruptcy
Repossession
Debt Management Plan (DMP)
Defaults
Individual Voluntary Arrangement (IVA)

The mortgage options accessible to you will be influenced by the nature of your credit issues and their recency.

Repayment comparison

Compare borrowing on repayment or interest-only terms with the table below:

*Note: Rates provided are for illustrative purposes. For an accurate, up-to-date comparison, submit an enquiry for a buy-to-let mortgage broker to contact you promptly.*

Mortgage amount	Interest rate	Term	Repayment mortgage monthly payments	Repayment mortgage total paid over the full term	Interest-only mortgage monthly payments	Interest-only total paid over the full term
£140,000	2.0%	25 years	£594	£178,050	£234	£210,053
£150,000	2.75%	25 years	£692	£207,430	£343	£252,945
£180,000	3.5%	25 years	£901	£270,430	£525	£337,644
£200,000	5.0%	25 years	£1170	£350,882	£834	£450,182

Reviewing the table above, noticeable differences exist in monthly payments and total repayable amounts based on the chosen mortgage type. The suitability for you depends on your specific circumstances and investment intentions, which may evolve over time.

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

YES. Converting from an interest-only to a repayment mortgage is a practical move for landlords with sufficient property equity, allowing access to lower borrowing rates. This shift enables borrowers to gradually pay off their loan, whether for retirement preparation or to diversify their investment approach.

Eligibility Criteria

When contemplating buy-to-let repayment mortgages, it’s crucial to navigate varying eligibility criteria set by lenders, demanding a tailored application approach. Here’s an overview of the key factors:

Homeowner Status: Many lenders traditionally require applicants to be existing homeowners, though the evolving market sees an increasing number becoming more flexible on this front.
Rental Income Adequacy: Lenders typically expect rental income to range between 125% to 140% of the mortgage payments. This becomes particularly pertinent for repayment mortgages, where payments are higher than interest-only options.
Assessment of Personal Finances: Lenders delve into the applicant’s personal finances, scrutinizing income, expenditure, and credit files to gauge financial stability.
Age Considerations: Age caps are a prevalent aspect of eligibility criteria for most lenders. Understanding and meeting these age restrictions is crucial during the application process.
Loan to Value (LTV): Each lender defines its maximum allowable LTV percentage. Understanding this range, typically spanning from 60% to 80%, provides a vital parameter for your mortgage considerations. A lower LTV may signify a lower-risk profile for lenders.
Property Type Preferences: Lenders often exhibit a preference for standard constructions composed of bricks and mortar when approving repayment mortgages for buy-to-let properties. This consideration highlights the importance of aligning your property type with lender expectations.
Geographical Factors: Location plays a pivotal role in the approval process, with some lenders imposing restrictions on expats seeking repayment buy-to-let mortgages. Being mindful of these geographical considerations helps tailor your application to lenders aligned with your circumstances.