Our Interest Only Buy To Let Mortgage Service
With an interest only buy to let mortgage deal, you only pay off the interest payments to the mortgage lender on a monthly basis. By doing this the monthly cost of borrowing is greatly reduced, as you are only making repayments on your interest owed, not on the mortgage loan itself. However, if you are considering an interest only mortgage for a rental property, it is essential to have a repayment strategy in place to ensure that you can pay off the mortgage capital when the term of the buy to let mortgage ends.
Types of Interest Only Buy To Let Mortgage Deal Available
There are two main types of buy to let interest only mortgage available:
- Interest Only Tracker rate mortgages – an interest only tracker rate mortgage will follow the Bank of England Base rate
- Interest Only Fixed rate mortgage – an interest only fixed rate mortgage offers guaranteed interest rates for a set period, which gives you the reassurance of knowing exactly how much you will need to pay each month.
Bear in mind that an interest only mortgage may not necessarily be the right choice for you. Because of their less secure nature when compared to repayment mortgages, it is very important to do your research to make sure that an interest only mortgage is right for your circumstances.
How does an interest only buy to let mortgage work?
With an interest only mortgage you only pay back the interest that you owe each month on the mortgage, not the money you borrowed itself.
Benefits of an interest only buy to let mortgage
There are several reasons why you might consider an interest only buy to let mortgage, some of which include:
- Lower monthly repayments - The prospect of lower monthly payments, especially if you are unsure how much rent you will be charging, could be an appealing option and could make a buy to let mortgage more affordable in the short term.
- Potential extra cash - If your investment does well you might end up with spare cash left over after the mortgage has been paid off. You could find that you can afford to pay off the capital with some extra cash left over.
- Greater monthly cash flow – by having smaller mortgage outgoings each month than you would have with a repayment buy to let mortgage, a buy to let interest only mortgage could mean you have more money available to put into other areas of your buy to let business.
- Flexibility - Interest only mortgages can be more flexible than repayment mortgages, so you might be able to adapt payments month by month to suit your financial situation
Drawbacks of an interest only buy to let mortgage
While the monthly repayments you make on an interest only buy to let mortgage are likely to be lower than with a repayment mortgage, it is still important to make yourself aware of the potential downsides of this type of mortgage:
- Lack of security – unlike a repayment buy to let mortgage, you have no guarantee that you will be able to pay off the mortgage balance at the end of the term. You will still owe the full amount you originally borrowed at the end of the mortgage term. If you can’t pay it back, you could lose your property.
- The need to organise a repayment plan - You will need to have a repayment plan in place to pay back the full cost of the property at the end of the mortgage term. This is usually an investment, and so your ability to repay will be dependent on the performance of the investment vehicle you have chosen.
- The need for a bigger deposit – many lenders require a proportionally larger deposit for interest only mortgages
- Higher arrangement fees – buy to let mortgages, whether repayment or interest only, often charge higher arrangement fees than residential mortgages. Interest only mortgage rates can be harder to access in the first place unless you can provide a high initial deposit. If you have a lower deposit, a standard repayment mortgage may be a more feasible choice.
- Many mortgage providers prefer not to offer mortgage deals that are interest only because of the risk of negative equity due to future falls in property prices. You may need to be able to show that you have a particularly high deposit or a means of repaying the mortgage already in place.
Changes in 2017
From September 2017, further changes to how buy to let mortgages are regulated will be implemented that will make it more difficult for those looking to secure finance for buy to let properties.
A stricter stress test: Applicants for buy to let mortgages will now be subject to an even stricter stress test. Lenders will review the landlords’ ability to make mortgage payments in the event that interest rates increase to 5.5%.
Rental coverage ratio: Prior to the 2017 regulation changes, a landlord needed a rental coverage ratio of 125%. However, lenders now require landlords to have a rental coverage ratio of at least 145% for a standard buy to let property and 170% for a house in multiple occupation.
Review of the entire portfolio: Lenders will now review landlords’ entire portfolio when deciding whether to approve a mortgage application. This means if a landlord has a number of properties and only some of them are profitable then a lender may be reluctant to grant a mortgage.
To compare top mortgage rates and find the best interest only mortgage deals for you, use the mortgage calculator above to search over 5,000 deals based on your personal circumstances.
Speak to our specialist team to help you find the right mortgage option for you.
To discuss interest only options for buy to let call our mortgage team on 0117 403 4222 or request a callback.