Buy To Let Repayment Mortgage

Buy-to-let mortgages are investment opportunities that help you purchase a property to be let out for earning rent.

Generally, such mortgages are taken by landlords as interest-only options, which means you only need to pay the interest on the loan each month, with the loan amount needing to be paid when the loan period ends.

However, many landlords opt for buy-to-let repayment mortgages, which may be more suitable in certain instances. In this guide, we’ll be looking at what buy to let repayment mortgage is and whether it is a viable option for you. 

What Is A Buy To Let Repayment Mortgage?

A buy-to-let repayment mortgage is a loan provided for purchasing investment property, wherein the interest and capital are to be repaid monthly.

This means that the principal amount that needs to be repaid will be reduced every month along with the interest. Once all loan repayments are complete, you will immediately become the property owner without a mortgage registered as a legal charge against the property. 

It differs from an interest-only buy-to-let mortgage, where only the interest must be paid monthly, as mentioned above.

The capital amount also needs to be repaid once the loan term ends, so interest-only buy-to-let mortgages are more common than repayment ones for landlords because of the increased monthly rental profit. 

Why Would You Need A Buy-To-Let Repayment Mortgage?  

Buy-to-let repayment mortgages are suitable for investors who want to make arrangements for their retirement.

Repaying the capital amount along with interest allows you to own the investment property being let out without any debt registered against it. This means you get all the rental income instead of needing to save to repay the loan and paying a monthly mortgage payment. 

Furthermore, with buy to let interest only mortgages the property is usually sold later to repay the loan. Selling such a property can result in a capital gain.

With a BTL repayment mortgage, it can serve as an investment for the long term that can even be passed on to your children as there is no debt ultimately registered against the property. 

Eligibility Criteria

Lenders can have different criteria for providing a buy-to-let mortgage, but the eligibility requirements are generally quite strict for this type of loan.

With some lenders, the requirements for a repayment mortgage are even more so compared to an interest-only option due to higher monthly repayments, for example, the rental affordability could be more stringent. 

That is why proper research is necessary when selecting a lender to find one who suits your needs. Lenders usually require the following things before they offer a buy-to-let repayment mortgage:

1. Homeowner Status

This type of loan is usually only provided if you already own a home, termed as an ‘owner occupier’. 

2. Rental Income

The amount of rent expected from the property will determine the loan amount, and it should cover 125% to 140% of the monthly repayments, usually depending on your tax status. 

3. Employment And Income 

Many lenders must also ensure you have a proper job and adequate monthly income. Some lenders may have a minimum income requirement even for buy-to-let mortgages. 

4. Age

A borrower should be between the ages of 21 and 75 to typically apply for a buy-to-let mortgage.

5. Loan To Value (LTV)

The maximum LTV can vary from lender to lender but generally between 60% and 80% for repayment mortgages. 

6. Property Type

In most cases, buy-to-let repayment mortgages are only available for standard constructions. 

Getting A Buy-To-Let Repayment Mortgage Without Early Repayment Charges

You may incur an early repayment charge if you wish to refinance or repay a buy-to-let repayment mortgage within the mortgage product period, this is primarily associated with fixed rates but can also be the case with trackers and discounts.

While getting such a mortgage without early repayment charges may be possible, the admin fees and interest rates will usually be higher in those instances for this benefit.

That said, a few advantages of mortgage products without early repayment charges are mentioned here.

1. Selling The Property 

If you only intend to hold the property for a short period and sell it soon after to make a profit, paying the higher fees and interest might be better to avoid early repayment costs. 

2. Using It For Residential Purposes

Sometimes, investors may only want to let out the property for a short while before moving into it themselves. This will require converting the buy-to-let mortgage into a residential one.

3. Development And Remortgaging 

You may plan to develop the property and remortgage it at its new value. 

4. Flexibility Requirements

As an investor, you may require greater portfolio expansion and remortgaging flexibility. 

5. Completing The Repayments Quickly

Other assets may be available, allowing you to pay the mortgage on the property quickly. 

Getting The Best Buy-To-Let Repayment Mortgage Rates

To get the best mortgage rates, follow these steps:

1. Save As Much As Possible (having a larger deposit)

By saving a larger amount of money, you can put down a bigger deposit, which will make more lenders willing to provide a repayment buy-to-let mortgage.

Moreover, they typically offer better rates. A higher deposit’s benefit is similar across both repayment buy-to-let mortgages and interest only buy to let mortgages. 

2. Ensure A Good Credit History

As with all loans, a good credit history makes getting a buy-to-let repayment mortgage easier since lenders have greater trust regarding repayments. 

3. Conduct Proper Research

Before deciding on a lender, make sure to look around and check out multiple deals to get the best rates. A mortgage broker can help you out with this. 

4. Pay Off Any Outstanding Loans 

If possible, ensure all other loans are completely repaid before applying for a buy-to-let repayment mortgage. Lenders will potentially see your chances as improved for covering rental voids. 

Buy-To-Let Repayment Vs. Interest-Only Mortgages

While an interest-only buy-to-let mortgage is more popular than a repayment option, which one you should apply for will depend on your personal goals and requirements. 

The monthly cash flow in interest-only mortgages is much better, especially at the beginning of the loan term.

This is because there may not be much rental surplus left after making the monthly repayments in the case of a repayment mortgage. 

On the flip side, a repayment buy-to-let mortgage can reduce interest in the long term since both the capital amount and interest get reduced each month. This also means you do not need to have a repayment plan in place.

In the case of an interest-only mortgage, such a plan is crucial for repaying the loan once the term ends, and the lender will assess this as part of the application.    

Since you need to repay the principal amount after paying interest each month, this is a significant downside to getting an interest-only buy-to-let mortgage. 

Buy-To-Let Repayment Mortgages In The Case Of Multiple Properties

Diversifying the mortgages is good for an investor with multiple buy-to-let properties in their portfolio. As a portfolio landlord, you may want to have both interest-only and repayment buy-to-let mortgages based on your plans for the property. 

This will ensure a good cash flow through interest-only mortgages while allowing you to become the owner of the repayment mortgage properties. 

Getting A Buy-To-Let Repayment Mortgage With Bad Credit 

Getting any type of mortgage, including a buy-to-let repayment one, is extremely difficult if you have bad credit. You can become ineligible for many other types of mortgages in cases of bankruptcy and similar credit issues.  

You may still be able to get such a BTL repayment mortgage even with bad credit problems like adverse County Court Judgements (CCJs), arrears and late payments, repossession, bankruptcy, and Debt Management Plan (DMP).

A specialised mortgage broker will be there to guide you through and find you a suitable lender for your personal circumstances. 

Similarly, issues like defaults and Individual Voluntary Agreements (IVA) do not make you potentially ineligible for such a mortgage.

But as with any credit issues, the type of mortgage you can get depends on the lender, the problems faced, and how recently they occurred. 

FAQs  

1. Can an interest-only buy-to-let mortgage be converted into a repayment one?

Yes, getting your buy-to-let interest-only mortgage converted into a repayment one is possible. This will usually be done through the remortgage process. 

2. What is the most significant benefit of a buy-to-let repayment mortgage?

Compared to interest-only buy-to-let mortgages, repayment ones have reduced interest, as the interest and loan amount keep reducing as they are repaid along the term. Additionally, no repayment vehicle is needed at the end of the mortgage term. 

3. Why are interest-only buy-to-let mortgages more popular than repayment ones?

Interest-only buy-to-let mortgages allow landlords to receive rent from the investment property every month, and the profit is greater since only the interest needs to be paid each month.

4. Is the total loan amount available under repayment buy-to-let mortgages smaller than interest-only mortgages? 

Some lenders offer smaller loans through a repayment buy-to-let mortgage rather than an interest-only option as they alter their affordability calculations.

If the BTL repayment monthly mortgage payment is more than the new rental income, this may lead to increased questions from the lender.  However, lenders will mainly stress-test the interest rate if the repayment is only on interest. 

5. What factors to consider when looking for a good buy-to-let repayment mortgage?

Apart from the LTV, which depends on your deposit, you should check whether the lender has any early repayment charges when applying for a buy-to-let repayment mortgage. 

Conclusion

While interest-only buy-to-let mortgages are more popular, there are a few instances where a repayment mortgage might be a better choice.

For instance, It may be the best option for landlords with a lot of surplus disposable income and can financially manage an increased monthly payment, as it will ensure the capital is repaid at the end of the term. 

Additionally, the interest longer term is lower on a repayment loan, so paying off the loan and interest quickly may be possible with proper financial planning.

And once you become the property owner, it can even be passed on as an inheritance or used for retirement purposes without any mortgage debt being registered against it. 

**A buy to let mortgage will be secured against your property.

Some types of buy to let mortgages are not regulated by the Financial Conduct Authority.

All content is written by qualified mortgage advisors to provide current, reliable and accurate mortgage information. The information on this website is not specific for each individual reader and therefore does not constitute financial advice.