Interest only buy to let mortgages – Lenders, rates and best deals
Many people are now looking for cheaper ways to repay their mortgage balance. Mortgage lenders expect monthly repayments for buy-to-let property to exceed the borrower’s mortgage.
This article will discuss how interest-only mortgage payments can lower monthly costs and whether an interest-only basis repayment is the best option.
Enquire here today to speak with a mortgage advisor. All of our mortgage brokers are regulated by the financial conduct authority and will ensure to find you the best mortgage deal.
What is an interest-only mortgage to buy-to-let?
The mortgage is a combination of two products. A buy-to – a mortgage that you rent out a property, and an interest-only – the repayment type for which the buy-to-let is arranged. The interest portion of the loan amount will be repaid each month, but the full capital will be due at the end of the mortgage term.
Are interest rates only good for buy-to-let properties?
An interest-only mortgage is a popular choice for buy-to-let investors as it is the most affordable form of borrowing. This is because you pay only the interest you owe each month. A repayment mortgage would have your Owings decrease.
Let’s look closer at the benefits and drawbacks of this method.
Advantages and disadvantages of interest-only buy-to-let mortgages
Other benefits of interest-only payments for buy-to-let properties include:
- The monthly mortgage obligation is lower
- You can view the lower monthly payment as a cushion if the property is not let.
- You can have positive tax consequences as interest on your mortgage may be offset against rental income. This could reduce your personal income tax bill. This will change in April 2020.
However, there are some disadvantages to an interest-only mortgage. These are:
- The amount of capital that you borrowed originally will not decrease
- You could be exposed to the volatile housing markets if you plan to sell the property to pay off the debt. Selling the property at a lower price than its original value can lead to problems.
- If you leave the term unfinished, you may pay more interest than a repayment mortgage. This is because interest is calculated on a decreasing balance and can be recalculated every month.
Talk to a mortgage advisor for the best advice today, free of charge with no obligation.
Do I qualify for an interest-only mortgage to buy to let?
Lenders may view interest-only mortgages as riskier than traditional residential mortgages. Therefore, the criteria for eligibility for these mortgages might be stricter.
There are some restrictions that lenders have in common that must be considered.
- First-time buyers are unlikely to be offered an interest-only mortgage, but there may be mortgage lenders who will.
- Some lenders limit the number of buy-to-let mortgages that their lenders can hold. This can cause portfolio construction to be hampered (although portfolio specialists are available).
- There is usually a minimum age restriction of 21. However, some applicants may be considered at 18.
- A substantial deposit is required, usually 25%. However, some lenders will consider a minimum of 15%. We will discuss this in detail.
These points only apply to buy-to-let mortgages that are interest-only. However, many factors can impact your decision about a mortgage.
These are:
Personal income and affordability
Many mortgage lenders now require proof of income and rental income to be approved for buy-to-let mortgages. Some lenders will assess your affordability case by case, but others prefer to multiply your income to calculate your loan amount.
4 to 5 times your salary is preferred by many, although some may be able to offer you a higher multiple.
Rating credit
You may be eligible for an interest-only mortgage if you have bad credit. However, this will depend on what type of adverse you have, when it occurred and how long it has been paid off.
Talk to an advisor about how your credit score could impact your mortgage application. We have lenders who work with bad credit.
Type of property
Before granting you a loan, many lenders will consider the type of property you are looking to purchase. It is because some property types are more difficult to rent than others.
It may be more challenging to let the property if it is a nonstandard construction.
Your employment type
Your chances of being approved for a mortgage are more significant if you work a regular full-time job than a self-employed individual. This doesn’t mean you can’t get an interest-only mortgage to help you buy a home if your job is full-time.
Talk to an expert about your options. Enquire here. Our mortgage brokers are regulated by the financial conduct authority and financial services register.
What is the maximum amount I can borrow using an interest-only BTL
It all depends on your income, rental expectations, deposit amount, property type, credit history, and credit history.
Lenders will evaluate your interest-only buy-to-let mortgage application to determine if it is a viable investment. This is based on the rental return, which is the monthly rent amount. It must be greater than the monthly mortgage obligation.
Lenders would typically require that the rental yield equal to 125% of the mortgage payment, at a rate of 5%.
A £100k mortgage at a rate of 5.5% would cost you £417 per month, with 125% being £521 per month. This investment must be more profitable than the monthly rental charge.
Once the property has been valued, you can confirm the potential rental income.
Due to rising costs for landlords, some lenders are raising the amount needed and introducing different income coverage rates (ICR).
As an example, suppose you have the same £100k mortgage:
- Lender A will need a rental income of £573, with an ICR of 5.5%, stressed at 125%.
- Lender B will need a rental income of £642, with an ICR of 5.5% and a maximum of 140%.
As you can see, the differences between lenders can be significant and could lead to a decision. However, it is possible to find lenders that prefer a lower rental income coverage ratio.
To get started, enquire here.
Use your personal income to make more money on a buy/to-let
A buy-to-let interest-only application, as mentioned above, is evaluated by looking at the rental income. If the borrower is short of the required amount, some lenders will allow the borrower to use their personal income.
Other lenders may use an affordability assessment to create a customised approach for each person’s situation.
How much deposit can I make?
Due to the greater risk involved in interest-only mortgages, most lenders require a large deposit.
This is currently 25%. Therefore, a 75% loan to value (LTV) is required.
Some lenders may offer a loan up to 80% LTV to those who have rented before.
Based on your situation, the experts we work alongside can help you determine how much deposit is required to buy to let an interest-only mortgage.
Send us an enquiry, and we’ll get back to you as soon as possible.
Or learn more about what deposit is needed for a buy-to-let mortgage.
Repayment or interest-only: Which type is better for a buy-to-let property?
Both repayment and interest only have their pros and cons. Repayment mortgages are when the debt is paid off after the mortgage term has ended, which in most cases is 25 years.
An interest-only mortgage will allow you to split the cost in half. You’ll still need capital at the end, but your monthly bills are cheaper.
Strategy to pay back the interest
If you choose to buy-to-let interest only, you will need a plan to pay the capital. A repayment plan is something that most mortgage lenders require before they will consider lending to you.
These could be:
- At the end of the loan term, the property must be sold
- An ISA in which you make regular payments to cover capital
- Stocks and shares
- Remortgaging to a standard or other interest-only loan
A mortgage advisor will be able to discuss the best repayment options and terms for your buy-to-let mortgage.
Send an enquiry to get started.
What are the best rates on a BTL interest-only mortgage
The interest-only mortgage rates can vary from one lender to another. This is why we only work with ‘whole of market mortgage advisors who have access to the best buy-to-let interest-only mortgages available in the UK.
Lloyds, Halifax, and TSB offer interest-only buy-to-let mortgages and repayment mortgages. There are also several specialist lenders.
It all depends on what they are willing to pay for LTV (loan-to-value) – some people will accept an 80 or even 85% LTV while others would take 90% LTV.
Rate types are also important to mention. Lenders offer a variety of products to meet borrowers’ needs. Some provide different terms if you choose an interest-only buy-to-let mortgage at a fixed 5-year rate.
It is important to remember that only a few people can get the best deals in the market. The sheer number of products and lenders available can make it difficult for the majority to get the best rate.
To get the best deal, you should send an inquiry to speak with one of our experts.
What tax treatment applies to this type of mortgage?
Significant changes have been made to the tax treatment of landlords who own buy-to-let properties. The 2015 Summer Budget announced that you would not be eligible for tax relief beyond 2020. We discuss this below.
Tax relief for personal income
In the past, landlords declared rental income after deducting mortgage interest and expenses to lower their personal tax bills.
However, April 2017 changed, and mortgage interest and expenses can no longer be deducted. April 2020 will see a tax credit.
All rental income will become taxable by April 2020, but landlords will still be eligible for a 20% credit based on their mortgage interest payments.
Stamp duty increases
Stamp duty is the tax you pay on purchasing a property in the UK. However, changes were made to affect properties for rent and second homes. The following stamp duty rates will apply as of April 2016.
- Properties up to £125k- 3%
- £125k – £250k – 5%
- £250k+ – 8%
These figures were based on HMRC information and were correct when written. Our experts can help you with any changes.
Talk to an expert about your interest only buy to let requirements today
We work with mortgage brokers with the extensive market knowledge and can advise on interest-only repayments. They also explore the market to help you find the best deals.
Send us an enquiry, and we look forward to finding you the best mortgage deal on the market.