Buy To Let Mortgages – Interest Or Repayment?

There are thousands of buy to let morgage products currently on the market, but before deciding on a specific product you need to decide whether a repayment mortgage would be better for you than an interest only mortgage, or vice versa.

How to Decide

 Both repayment buy to let morgage deals and interest only deals have their pros and cons. The main question you have to ask yourself though is ‘do you need to keep a portion of the rent each month for yourself?’

If you need a percentage of the rent each month to top up your personal income then an interest only buy to let morgage will be a better choice. By only paying the interest on the loan and not the capital you should be left with a decent amount spare each month to help with living costs, or alternatively to save in a bank account opened for the reason of paying unexpected bills e.g. mortgage payments during void periods, repair costs for the property, late or missing rent payments etc.

It is important to point out though that an interest only buy to let morgage won’t cover the cost of the property at the end of the mortgage terms. You will need to pay the capital in full or sell the property.       

If you don’t need to keep some of the rent for personal expenses though then a repayment buy to let morgage will be more beneficial. This type of mortgage enables you to pay the capital off over the terms of the mortgage so that you should, theoretically, own the property outright at the end of the mortgage terms.

Again, it should be pointed out that opting for a repayment buy to let morgage will leave you with very little or no spare cash from the rent each month and so unexpected bills will need to be covered by your personal income. Void periods and evictions can be costly so you need to make sure you have adequate funds to cover all eventualities.

The Pros and Cons in a Nutshell

Repayment buy to let mortgages

Repayment mortgages enable you to own the property at the end of the mortgage term without the need to make a separate payment that covers the capital originally borrowed. The monthly payments will require the majority of the monthly rent though, so leaving little or nothing for you. In addition, you will be required to pay tax on the capital payments you make.

Interest only buy to let mortgages

Interest only mortgages allow you to keep a percentage of the rental income each month to do with as you like. You will need to pay the outstanding capital at the end of the mortgage terms though and so provisions need to be made for this. You can however deduct your mortgage interest payments from your rental income when it comes to paying tax, so reducing your tax bill considerably.

In Summary

Think carefully about what you want in terms of spare income when choosing a buy to let morgage and only then decide whether a repayment or interest only mortgage will suit you best.