It’s no secret that landlords have had a tough time over the last few years. Faced with challenges, landlords have tried many options to keep costs low and maintain profits. With that in mind, which payment option should landlords choose? Between repayment or a interest-only buy-to-let mortgage, which one is right for you?
This article does not constitute advice. Professional advice should be taken prior to acting on any part of it. Your home may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.
If you’re a landlord seasoned landlord, you probably know that generally, buy-to-let (BTL) mortgages are similar to regular mortgages. But there are a few key differences. Most notably, they usually come with higher fees and interest rates and the minimum deposit for a BTL mortgage while usually about 25% can be as much as 40%.
When it comes to mortgage repayment options, there are two options to choose from.
Interest-only
With an interest-only mortgage, you only pay back the interest on the loan every month, and not the capital. But at the end of the mortgage term — however long that is — you are required to pay back your mortgage provider in full the amount you originally borrowed.
Interest-only mortgages are the more popular option for landlords if at the end of the mortgage term, you plan to sell the property.
It’s important to remember that at the time of sale, landlords will still be required to pay any tax due on capital gains, but you’ll retain any equity earned over the years. The interest-only cost of the buy-to-let mortgage is tax-deductible. If you want to hold onto the property when the time is up, then you need to come up with the funds to repay the original loan in full.
Repayment
Repayment mortgages are more expensive per month than interest-only mortgages because you’ll have to pay the interest on the loan as well as part of the principle that you borrowed. Of course, the longer your monthly payments go on, the more of the initial loan amount is paid off, resulting in owing less to your lender, and higher equity.
Although often organised to front-load the interest, the mortgage repayments are planned out so that both the interest and full amount borrowed are paid back in full at the end of the term and you, the landlord, will own the property outright.
Which option is right for you?
We work with many medical and dental professionals who are also landlords. Every individual is different and it depends entirely on your investment goals and objectives and for many, the state of the economy and market at the time you borrow. Don’t forget about the tax implications associated with B2L property investment.
If your plans for property ownership include owning several different properties over the course of your lifetime or don’t see being a landlord as a long-term solution, an interest-only mortgage might be right for you. You keep more of the monthly income and don’t need to worry about paying off the loan. Interest-only mortgages work best for those wanting to generate an income.
If you want to retain ownership of the property once the repayment term ends and plan to pass your property on after death, or you’re interested in capital growth and a lump sum, a repayment mortgage might be the right choice.
Work with a professional
Even experienced landlords need advice sometimes, so don’t be afraid to discuss options with a mortgage adviser so you can make the best decision for your circumstances.
Speak to a professional who can help you secure the right mortgage deal for you and incorporate your investment portfolio plans into your overall investment strategy. Get in touch today.
Need help to secure a low-cost mortgage?
Mortgages | Buy to Let | Property | Mortgage Planning |
Dental & Medical Financial Services have been helping doctors and dentists with finding low-cost mortgages for your home and investment properties for over 25 years.
Find a Mortgage using our online Mortgage Finder Tool