One option that property investors often consider is a buy-to-let repayment mortgage. This type of mortgage can be an effective way to finance an investment property, potentially leading to outright ownership at the end of the mortgage term. While buy-to-let mortgages are typically interest-only, a repayment mortgage offers a structured approach to paying off both the interest and the capital over time. In this guide, we’ll explore the intricacies of a buy-to-let repayment mortgage, providing you with the knowledge to make informed decisions about your property investment strategy.
A buy-to-let repayment mortgage is a type of mortgage specifically designed for people who are buying a property as an investment, rather than as their own home. The idea is that they rent out the property, and the rent paid by the tenants can be used to pay off the mortgage.
In a repayment mortgage, each monthly payment covers both the interest on the loan and a portion of the capital. Over the term of the mortgage, you gradually pay off the full loan amount. At the end of the mortgage term, provided all payments have been made, you will own the property outright.
Yes, it is possible to get a buy-to-let repayment mortgage. This type of mortgage is specifically designed for people who plan to buy a property and then rent it out.
Buy-to-let repayment mortgages can be more expensive on a monthly basis compared to interest-only mortgages because you are paying off the capital as well as the interest. However, at the end of the term, you own the property outright, which can provide you with a significant asset and increased financial security. It’s important to note that, as with all mortgages, failing to keep up with repayments can put your property at risk.
However, getting a buy-to-let repayment mortgage involves meeting certain eligibility criteria. Please find them below.
Eligibility criteria for a buy-to-let repayment mortgage can vary between lenders, but there are some common requirements:
Income: Many lenders require applicants to have a minimum annual income, usually around £25,000, not including the potential rental income from the property. This is to ensure that you can cover mortgage repayments during periods when the property might be vacant.
Age: Generally, you must be at least 18 years old to apply for a buy-to-let mortgage, and many lenders have an upper age limit by which the mortgage must be repaid in full. This upper limit often falls between 70 and 75 years of age.
Ownership: You may need to already own a property, either outright or with an outstanding mortgage, before you can take out a buy-to-let mortgage.
Deposit: Typically, buy-to-let mortgages require a larger deposit compared to standard residential mortgages. You should expect to provide at least 20–25% of the property’s value, although some lenders may require as much as 40%.
Rental Yield: Lenders usually expect the rental income to be 125–145% of the monthly mortgage payments (depending on the lender and your personal circumstances), ensuring that the rent will more than cover the mortgage costs.
Credit History: A good credit history is generally necessary for approval. Lenders will be more hesitant to approve applications from individuals with a history of missed payments, defaults, or bankruptcy.
Property Type: The property type can influence eligibility. For example, some lenders won’t provide mortgages for high-rise flats, properties of non-standard construction, or homes with a commercial aspect.
Number of Mortgages: If you already own several properties, some lenders may limit the total number of buy-to-let mortgages you can have.
There are several reasons why a landlord might prefer a repayment mortgage over an interest-only mortgage for their buy-to-let property. Here are a few:
Full Ownership: With a repayment mortgage, the landlord gradually pays off the entire loan amount. At the end of the mortgage term, the landlord owns the property outright. This can provide a significant asset and greater financial security.
Lower Long-term Costs: Although monthly payments on a repayment mortgage are higher than those on an interest-only mortgage, the total amount repaid over the entire mortgage term can be less with a repayment mortgage. This is because you’re reducing the capital debt from the beginning, so less interest accumulates over time.
No Need for a Repayment Vehicle: Interest-only mortgages require a plan or “repayment vehicle” for paying off the capital at the end of the mortgage term, such as an investment or the sale of the property. A repayment mortgage doesn’t need this because the capital is paid off gradually over the term of the mortgage.
Less Dependence on the Property Market: With a repayment mortgage, the landlord isn’t relying on the property’s value increasing. With an interest-only mortgage, if property values fall, the landlord could be left with a property worth less than the mortgage owed.
Flexibility to Sell: If the property market is strong and the landlord decides to sell before the end of the mortgage term, having a repayment mortgage means the outstanding mortgage will be less than with an interest-only mortgage (assuming they started at the same time). This could result in a larger profit from the sale.
While there are clear benefits to a repayment mortgage, it’s important to remember that the monthly repayments are higher than for an interest-only mortgage because they cover both the interest and the capital repayment. This could affect cash flow, which is a crucial factor for many landlords. The best choice depends on the individual’s financial situation, their goals as a property investor, and their risk tolerance. As always, getting independent financial advice is recommended.
Buy-to-let repayment mortgages and interest-only mortgages work in fundamentally different ways:
Buy-to-let Repayment Mortgage
A buy-to-let repayment mortgage requires you to pay back both the capital (the amount you borrowed to buy the property) and the interest (the lender’s charge for lending you the money) each month. Over time, you gradually pay off the entire loan. By the end of the mortgage term, you will have paid off all the debt and own the property outright. Monthly repayments for a repayment mortgage are higher than for an interest-only mortgage because you’re paying off the capital and the interest.
Buy-to-let Interest-Only Mortgage
With an interest-only mortgage, your monthly payments only cover the interest on the loan – you do not repay any of the capital. The full loan amount remains outstanding for the term of the mortgage and must be repaid in a lump sum at the end of the term. This repayment is often covered by selling the property, although other repayment strategies can be used such as other investments or savings. The advantage of this type of mortgage is that the monthly repayments are lower because you’re only paying the interest. However, you must have a credible plan in place to repay the lump sum at the end of the term.
A buy-to-let repayment mortgage, where you gradually pay off both the capital and the interest over the term of the loan, offers several advantages:
Ownership: The most significant benefit is that at the end of the mortgage term, you fully own the property. You don’t owe anything more to the lender, and the rental income you receive (minus expenses) will be pure profit. It also adds a valuable asset to your portfolio, increasing your net worth.
Decreasing Interest: As you repay the capital, the amount of interest you pay also reduces over time because interest is calculated based on the outstanding loan amount. This means more of your repayments go towards paying off the capital as you progress through the mortgage term.
Reduced Risk: Having a repayment mortgage reduces the risk associated with property price fluctuations. If you plan to repay an interest-only mortgage by selling the property, a drop in property prices could leave you with a shortfall. With a repayment mortgage, you’re gradually reducing the debt, regardless of the property’s value.
Predictable Repayment Plan: A repayment mortgage offers a predictable repayment plan. You know exactly how much you need to pay each month and by when the mortgage will be fully repaid.
No Need for a Repayment Vehicle: With an interest-only mortgage, you need a solid investment plan or “repayment vehicle” to pay off the lump sum at the end of the term. This is not required for a repayment mortgage, which might save you time and effort in planning.
Potential for Better Deals: Some lenders view repayment mortgages as less risky and may offer better deals or preferential interest rates to those opting for repayment mortgages.
Peace of Mind: Knowing that you’re steadily working towards full ownership of your property can provide peace of mind.
However, these advantages come with the trade-off of higher monthly payments compared to an interest-only mortgage, which can affect your rental yield and cash flow. Therefore, it’s important to consider your long-term investment strategy, cash flow needs, and risk tolerance before deciding on the type of mortgage that is right for you.
While a buy-to-let repayment mortgage has several advantages, it also comes with a few potential downsides:
Higher Monthly Payments: Because you’re paying off both the interest and the capital every month, your monthly payments will be higher than they would be with an interest-only mortgage. This can affect your cash flow and potentially reduce your monthly profit from rental income.
Lower Potential Yield: The higher monthly mortgage payments may reduce the rental yield (the annual return on your investment as a percentage of the property’s value). This could make other investment opportunities more attractive by comparison.
Less Flexibility: The commitment to higher monthly repayments might leave you with less financial flexibility for other purposes, such as maintenance or improvements, coping with void periods, or investing in additional properties.
Less Tax-efficient: In the UK, landlords can offset the interest part of their mortgage payments against their rental income for tax purposes. With a repayment mortgage, as the amount of the mortgage payment that is interest decreases over time, the tax relief also reduces.
Market Value Risks: Paying down the mortgage does not protect you against falls in the market value of the property. If property prices fall, you could end up in a situation where you owe more to the lender than the property is worth, which is known as negative equity.
No Guarantee of Full Ownership: While a repayment mortgage is designed to result in full ownership of the property at the end of the term, if you’re unable to keep up with repayments for any reason, you risk repossession of the property.
There are numerous lenders in the UK that offer buy-to-let repayment mortgages. Each has their own criteria for lending and will offer different interest rates, so it can be helpful to shop around or use a mortgage broker to find the best deal for your circumstances. Here are a few lenders that offer buy-to-let repayment mortgages:
Barclays: Barclays offers a range of buy-to-let mortgages and has options for both new landlords and experienced ones with multiple properties.
Nationwide: Nationwide, through its subsidiary The Mortgage Works (TMW), offers a range of buy-to-let mortgages for various types of investors.
Santander: Santander offers buy-to-let mortgages for properties in the UK.
HSBC: HSBC offers buy-to-let mortgages for first-time landlords and experienced investors.
NatWest: NatWest provides a range of buy-to-let mortgage products.
Halifax: Halifax, part of Lloyds Banking Group, offers buy-to-let mortgages.
Coventry Building Society: Coventry Building Society has options for buy-to-let mortgages.
Please note that the mortgage market can change frequently, so the providers listed above may not represent the current situation. Always do your own research or seek professional advice to ensure you’re accessing the most up-to-date and relevant information.
Yes, it is typically possible to switch from an interest-only buy-to-let mortgage to a repayment mortgage, though the exact process and eligibility will depend on your lender’s policies.
Here are some general steps you might need to follow:
Contact your Lender: The first step is to get in touch with your current lender. Discuss your plans with them and ask about their process for switching from an interest-only to a repayment mortgage.
Affordability Assessment: Your lender will likely conduct an affordability assessment to ensure you can manage the higher monthly repayments that come with a repayment mortgage. This could involve looking at your income, outgoings, credit history, and the rental income from the property.
Terms and Conditions: If the lender agrees to the switch, they will provide new terms and conditions for your mortgage. This should include details about your new monthly payments and the term of the mortgage.
Mortgage Advisor: It could be beneficial to talk to a mortgage advisor or broker. They can offer advice on the implications of switching, such as how it could impact your cash flow or tax situation. They may also be able to find you a better deal with a different lender, if your current lender isn’t willing to switch or if their terms aren’t favourable.
If you have more than one investment property, you can still obtain a buy-to-let repayment mortgage for each of them, but there are a few additional factors to consider:
Affordability: Lenders will assess whether you can afford the repayments on all of the properties. They will take into account your income, the potential rental income from the properties, your credit history, and any other financial commitments you have.
Portfolio Lenders: Some lenders specialise in portfolio mortgages, which allow you to have your properties under a single mortgage. This can make managing your properties simpler, as you’ll have just one lender and one set of terms to deal with.
Mortgage Rates: The more properties you own, the more risk the lender might perceive, which could result in higher interest rates on your mortgages.
Lender Limits: Some lenders may limit the number of buy-to-let mortgages you can have or the total amount you can borrow.
Tax Implications: The more properties you own, the more complex your tax situation can become. UK landlords can offset mortgage interest against rental income for tax purposes, so having multiple interest-only mortgages could have tax advantages. However, with the changes in mortgage interest tax relief, it’s important to get tax advice on this matter.
Diversification: Owning multiple properties allows you to spread risk. If one property is vacant, you may still have rental income from the others. However, diversification also means managing multiple tenants, maintaining multiple properties, and potentially dealing with different mortgage payments and terms.
Yes, it’s possible to get a buy-to-let mortgage without early repayment charges (ERCs), but they’re less common and may come with a higher interest rate.
ERCs are costs that you would incur if you paid off your mortgage early, either by making overpayments above the lender’s set threshold or by paying it off in full before the end of the fixed-rate or discounted period. They are a way for lenders to recoup some of the interest they would lose if you repay your mortgage early.
Mortgages without ERCs can offer more flexibility, allowing you to make additional repayments or pay off the mortgage entirely without facing extra costs. This can be useful if you anticipate that your financial situation may change in the future or if you want the freedom to refinance or sell the property without incurring charges.
However, to compensate for the potential loss of interest income, lenders often charge higher interest rates on mortgages without ERCs, or they may have other fees and charges. It’s important to consider all costs involved, not just the absence of ERCs, when comparing mortgage products.
To get the best rates on a buy-to-let repayment mortgage, there are several factors to consider:
1. Shop Around: The most effective way to find the best rates is to shop around. Different lenders offer different rates, so it’s worth comparing multiple options. Online comparison tools can be a useful starting point, but also consider speaking to a mortgage broker who has access to deals that may not be publicly advertised.
2. Improve Your Credit Score: A better credit score often leads to better mortgage rates, as lenders see you as less risky. You can improve your credit score by paying bills on time, reducing existing debts, registering on the electoral roll, and checking your credit report for any errors.
3. Save for a Larger Deposit: Generally, the larger your deposit in relation to the property value (the loan-to-value ratio or LTV), the better mortgage rate you can get. If you’re able to save a larger deposit, this could help secure a lower interest rate.
4. Consider a Fixed-Rate Mortgage: Fixed-rate mortgages can offer lower initial rates compared to variable-rate mortgages. However, the best choice will depend on your financial situation and expectations of future interest rate changes.
5. Reduce Your Debt: Having less debt can make you more appealing to lenders and may result in better rates. This includes reducing the balance on credit cards and any other loans.
6. Hire a Broker: Mortgage brokers have a good understanding of the market and have relationships with various lenders. They can help find the best deals that you may not find on your own.
7. Consider the Full Cost: The lowest interest rate doesn’t necessarily mean the cheapest mortgage overall. Be sure to factor in all costs, such as arrangement fees, valuation fees, and any early repayment charges.
Yes, having bad credit can impact your ability to secure a buy-to-let repayment mortgage. Lenders use your credit score and credit history as a way to assess the risk involved in lending to you. If you have bad credit, lenders may see you as a higher risk borrower, which can affect your application in several ways:
Higher Interest Rates: Lenders may charge higher interest rates to borrowers with bad credit to offset the perceived risk. This can make your mortgage more expensive over the long term.
Larger Deposit: You may be required to provide a larger deposit to secure the mortgage. Typically, a buy-to-let mortgage requires a deposit of around 25% of the property’s value, but if you have bad credit, lenders might ask for a higher percentage.
Limited Choices: Some lenders might not offer mortgages to people with bad credit at all, limiting the number of options available to you.
Loan Amount: The amount you can borrow might be lower if you have bad credit.
However, a poor credit history doesn’t necessarily mean you can’t get a buy-to-let mortgage. There are lenders who specialise in providing mortgages to individuals with bad credit, often referred to as “subprime” lenders or “adverse credit” lenders. The terms offered by these lenders might not be as favourable as those from mainstream lenders, but they could provide a way for you to secure a mortgage.
Improving your credit score can help increase your chances of securing a more favourable mortgage deal. You can do this by paying your bills on time, reducing your level of outstanding debt, and correcting any errors on your credit report.
Buy-to-let mortgages can be either interest-only or repayment, similar to residential mortgages. The choice between the two typically depends on your financial situation and investment strategy.
As we mentioned above, each type of mortgage has its own advantages and considerations, and the right choice for you will depend on your financial situation, investment strategy, and risk tolerance. A financial advisor or mortgage broker can help you understand the options and choose the best one for your circumstances.
Calculate your mortgage payments
To calculate your mortgage payments, you will need the following information:
1. The loan amount (the principal)
2. The interest rate (annual)
3. The loan term (in years)
The formula for calculating monthly mortgage repayments is a bit complex because it takes into account the compounding nature of the interest. Here’s a simplified version:
M = P [r(1 + r)^n] / [(1 + r)^n – 1]
In this formula:
* M is your monthly repayment.
* P is the principal loan amount.
* r is your monthly interest rate, derived from your annual interest rate divided by 12.
* n is your number of payments (the number of months you will be paying the loan).
Let’s say you have a £150,000 buy-to-let mortgage with a 3% annual interest rate, to be repaid over 25 years.
* First, calculate r: The monthly interest rate (r) would be 3% divided by 12 (to get a monthly figure), divided by 100 (to convert the percentage to a decimal). So r = (3/12)/100 = 0.0025.
* Then calculate n: The number of payments (n) would be 25 years times 12, which equals 300.
* Now you can use the formula to calculate M: M = £150,000 * [0.0025(1 + 0.0025)^300] / [(1 + 0.0025)^300 – 1], which works out to approximately £711 per month.
Please note that this calculation does not include other costs associated with a mortgage such as property taxes, home insurance, and any potential mortgage insurance. Also, the actual interest rate you receive from the lender can be different based on various factors like your credit score, the loan-to-value ratio, and the lender’s specific policies.
Yes, it is generally possible to change a residential repayment mortgage to a buy-to-let mortgage, but there are several factors to consider:
Lender Approval: You need to obtain permission from your lender before renting out a property financed by a residential mortgage. Some lenders may allow you to switch to a buy-to-let mortgage, while others may offer a ‘consent to let’ agreement if the rental arrangement is short-term.
Affordability Assessment: When converting a residential mortgage to a buy-to-let mortgage, lenders will carry out an affordability assessment based on the expected rental income from the property. They typically require the rental income to be 125% to 145% of the mortgage repayments.
Interest Rate and Fees: Switching from a residential to a buy-to-let mortgage may result in a higher interest rate, reflecting the higher risk associated with rental properties. There may also be fees for changing the mortgage.
Insurance and Legal Responsibilities: As a landlord, you’ll need to ensure you have the right insurance in place and that you meet all your legal responsibilities, including safety checks and protecting tenants’ deposits.
Tax Implications: Renting out a property can have tax implications. For example, rental income is taxable, and you might also need to pay Capital Gains Tax if you sell the property in the future.
Yes, you can repay a buy-to-let mortgage. Whether you choose a repayment or an interest-only mortgage will depend on your financial situation, tax considerations, and investment strategy. It’s important to consider the implications of each type of mortgage and to seek advice from a financial advisor or mortgage broker if you’re unsure.
If you’re asking about repaying your mortgage earlier than the agreed term, this is also possible, but there may be early repayment charges to consider. These charges can be significant, so it’s important to understand these costs before making additional repayments or repaying the loan in full. Each lender’s policy on early repayment will be detailed in your mortgage agreement. Always check this, and consider seeking advice if you’re unsure.
There are several reasons why landlords might prefer interest-only mortgages over repayment mortgages for buy-to-let properties:
Lower Monthly Payments: With an interest-only mortgage, you only pay the interest on the loan each month, not the capital. This leads to lower monthly payments compared to a repayment mortgage, which can improve cash flow – an important consideration for many landlords.
Tax Efficiency: Prior to tax changes introduced in the UK in 2017, landlords could offset their mortgage interest payments against their rental income, reducing their overall tax bill. The tax relief for landlords has been reduced since then, but it can still be beneficial for higher or additional rate taxpayers.
Investment Strategy: Landlords often view property as part of a larger investment strategy. The lower monthly payments of an interest-only mortgage might enable landlords to invest in more properties or diversify their investments. At the end of the mortgage term, the landlord might plan to sell the property to repay the capital, banking on the property having increased in value over the term of the loan.
Flexibility: The lower monthly payments provide more flexibility for landlords in case of void periods (when the property is not rented out) or unexpected costs (such as major repairs).
While there are clear benefits to an interest-only mortgage for landlords, there are risks and drawbacks as well. For example, at the end of the mortgage term, the full loan amount is still owed and needs to be repaid or refinanced. This could be an issue if property values have fallen or if the landlord’s financial circumstances have changed.
Yes, you can use a buy-to-let repayment mortgage for a House in Multiple Occupation (HMO), but there are specific considerations to be aware of.
Specialist Lenders: Not all lenders offer buy-to-let mortgages for HMOs, so you may need to approach a specialist lender or use a mortgage broker who can access these specialist products.
Higher Interest Rates: The interest rates on HMO mortgages can often be higher than for standard buy-to-let properties, reflecting the perceived higher risk and management complexity of HMOs.
Larger Deposits: Lenders may also require a larger deposit for an HMO mortgage. A typical requirement might be 25–30% of the property’s value, but it can be more.
Rental Income: Lenders will typically assess the viability of the loan based on the potential rental income from the property. In general, they will want the rental income to cover 125–145% of the mortgage repayments.
Licensing: If you’re buying an HMO, you’ll need to check if you require a licence from the local council. The requirements can vary depending on the size of the property and the area in which it’s located. Most lenders will require evidence of the appropriate licence before approving a mortgage.
Experience: Some lenders prefer borrowers to have prior experience as a landlord before they will offer a mortgage for an HMO, due to the added complexities of managing such properties.
Yes, it is generally possible to pay off a buy-to-let mortgage early. However, there are some important things to consider before doing so:
1. Early Repayment Charges (ERCs): If you pay off your mortgage in full or in part before the term has come to an end, many mortgage lenders charge you an early repayment fee. These fees, which are frequently a percentage of the amount repaid, can be substantial. Your mortgage agreement should contain information about any early repayment fees.
2. Overpayment Limits: Some mortgages allow you to overpay a certain amount each year without incurring charges. This can vary, but is often up to 10% of the outstanding mortgage balance per year.
3. Other Fees: There may be other fees associated with repaying your mortgage early, such as exit fees or administration fees. Again, these should be detailed in your mortgage agreement.
4. Investment Considerations: For landlords, paying off a mortgage early needs to be weighed against the potential benefits of investing that money elsewhere. Depending on the rental income, the property’s potential for capital growth, and other investment opportunities, it might be more beneficial to keep the mortgage and use your funds elsewhere.
5. Tax Considerations: Depending on your individual circumstances, there may also be tax considerations to take into account. For instance, mortgage interest can be offset against rental income for tax purposes, so paying off the mortgage early could potentially increase your tax liability.
The UK government started gradually implementing modifications to this tax relief in April 2017. Beginning with the 2020–2021 tax year, all of the amendments were put into effect. Landlords can no longer deduct mortgage costs from rental income to lower their taxable income under the new scheme. As an alternative, they get a tax credit worth 20% of their mortgage interest payments.
Due to this change, landlords who pay higher or additional rates no longer receive a full tax refund on mortgage interest, hence raising their overall tax burden. The adjustment should not significantly affect basic-rate taxpayers unless it causes their income to move into a higher tax bracket.
These regulations are intricate and may significantly affect your tax obligations as a landlord. To fully comprehend the implications for your particular situation, it is always advised to consult with a certified accountant or tax adviser.
Keep in mind that tax laws are subject to change, and how they affect specific individuals will vary. Please talk with your tax professionals about this.
A mortgage broker can provide invaluable assistance when you’re looking for a mortgage, including a buy-to-let mortgage. Here are some ways a broker can help:
1. Access to More Options: Mortgage brokers have access to a wide range of products, including those not directly available to the public. They can find mortgages that suit your specific circumstances, even if they’re from lenders you might not have considered.
2. Expert Advice: A broker’s job is to find the best mortgage for your needs. They understand the complexities of the mortgage market and can guide you through the process, explaining terms, rates, and potential issues.
3. Save Time and Effort: Finding the right mortgage can be time-consuming and complex. A broker can handle the legwork for you, searching for suitable products, comparing options, and negotiating terms.
4. Assistance with Applications: Brokers can help you put together a strong application, increasing the likelihood of acceptance. They know what information lenders are looking for and how to present it effectively.
5. Knowledge of Criteria: Each lender has its own criteria for lending. If you have unusual circumstances, such as being self-employed, owning multiple properties, or having a mixed use property, a broker can direct you to lenders who are more likely to approve your application.
6. Potential Cost Savings: By finding the most suitable mortgage with the best rates, a broker could potentially save you a significant amount of money over the term of your mortgage.
7. Continuous Support: A broker’s support doesn’t stop once you’ve been approved for a mortgage. They can assist you throughout the entire process, helping to deal with any issues that arise and ensuring everything proceeds smoothly.