Interest only or Repayment BuytoLet mortgages

Interest only or Repayment BuytoLet mortgages

12:51 PM, 24th May 2013, About 10 years ago 20

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Ying and Yang imageA common question from new Landlords is why are so many BuytoLet mortgages taken out on an Interest only basis rather than Capital and Repayment.

First of all it helps to understand that a BuytoLet mortgage seems very similar to a Residential mortgage, but it is not regulated in the same way by the Financial Conduct Authority FCA (the FCA has now replaced the FSA). This is because it is treated as a commercial loan, and investors are assumed to have a greater understanding of the commitments they are entering into than someone who may have no financial understanding buying their own main residence. The key is that a BuytoLet is seen by regulators as a business loan and BuytoLet investors should treat their property purchases using a mortgage as a business themselves.

If you were to offer any business, no matter what the industry, the option of:

  • a loan on Interest only with lower monthly payments or
  • a capital and repayment loan with higher monthly commitments but a reducing balance

Nearly every business would choose Interest only, because as the saying goes “Cashflow is King”

Now in practical terms, the biggest risk to a landlord is not being able to make the monthly mortgage payments. Therefore this risk is reduced using Interest only.

But what about reducing the loan size I hear you cry.

Interest only should hopefully produce a cash flow surplus on a reasonable yielding property and this should then be saved in a separate account for a rainy day to cover future mortgage payments, or used at your convenience to pay lump sums off the mortgage when there are no redemption penalties.

The control is now in your hands and not the lenders, vastly reducing your exposure to risk. If you take out an interest only loan it is easy to get the lender to convert this to Capital and Repayment, but the reverse is true with lenders being reluctant to convert a mortgage to interest only from Capital Repayment when you need to.

If you are sensible and treat all your rental income as part of the business e.g. don’t rush out on holidays or buy a Ferrari, you can now manage your cash flow and total debt outstanding yourself.

It is important to note that this strategy is not available or right in all circumstances, but a summary of why it is extremely popular for BuytoLet investors.

If you would like to view the most popular Buytolet mortgages available in the market today, see how much you can borrow and what it would cost please feel free to CLICK HERE for our BuytoLet mortgage calculator.

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Mark Alexander - Founder of Property118

13:01 PM, 24th May 2013, About 10 years ago

Excellent article Neil 🙂

The vast majority of my mortgages are interest only. The exception being a few which I took out in 2009 where only one lender was prepared to assist due to me having hit the exposure limits of the other lenders.

They gave me the choice of interest only at 60% LTV or 70% on a repayment basis. I took the 70% repayment option as I also believe I can make a better return that finance costs me. That's why I have several properties which are mortgages as opposed to far less properties mortgage free.

The great thing about property is that over the long term it is an appreciating asset. 20 years down the line, inflation will have had a positive effect on rental income and capital values but the loan outstanding on an interest only mortgage will remain the same as day one. In effect, inflation will have reduced the real value of the loan.

Given that none of us are immortal and that our properties will be moved on to somebody else at some point, the most likely exit route to pay off the loan will always be the sale of the property. Why, therefore, some landlords put strain on their cashflow by opting for a repayment mortgage, only to remortgage to raise cash again at some point, with all the costs incurred with that, is beyond me.

Another consideration is tax relief. You can only offset interest against rental income as an expense for tax purposes and not any capital repayment element. Therefore, with a repayment mortgage the actual cost increases year by year as the interest element reduces and the capital element of the repayment increases.

17:46 PM, 24th May 2013, About 10 years ago

That's a great article and puts a different view on the whole mortgage choice, I have both IO and repayment if I had found this info a bit earlier I maybe would have made different choices
However the repayment mortgages are only small around 60% of value of houses and bring in good returns as they was taken when rates was higher

Maybe I've had a bit of duff advice before!!!!


18:26 PM, 24th May 2013, About 10 years ago

I too have always taken out only IO mortgages, as I believe I can make a better return on my rental income and accumulated savings capital than I save by paying down the mortgage. This has been especially true over the last five years: I'm paying between 0.79% and 1.5% interest on my mortgages, whereas I can get 3% gross simply by keeping any surplus capital in a cash savings account, and much better than that if I renovate or improve my houses, or go in for building new houses as a small developer. I also invest surpluses in a SIPP pension, which again *should* eventually get me a better return than paying down the mortgage.

Of course there's a balance to be struck, and of course the mortgages have to be paid off eventually, but I find it deeply patronising when EU legislators or the nutters on propose that everyone, irrespective of their circumstances or financial nous, should be forced to take out repayment mortgages and IO mortgages should be banned as somehow inherently and dangerously risky. Are businesses that borrow money to invest in new technology, or new capital expenditure, or expansion, required to start repaying the capital from Day One? The whole point of bank lending in a capitalist economy is to earn a return for people who lend their money to a bank to invest it, and to oil the wheels of the wider economy with risk-assessed investments in profit-generating activities. Yes, of course the investors expect to be repaid, and to be able to seize assets from a business if they are not repaid, but to expect an immediate start on repayment before a borrower has even had a chance to start bringing his or her creative energies to bear on a project just strikes me as tying one hand behind their back and hampering the whole point of the original investment.

0:36 AM, 25th May 2013, About 10 years ago

Exactly IO keeps the LL in control of things.
Always try to have the biggest LTV on IO you can get.
Being in debt gives you control.
You don't want lenders being able to sell your properties and come out with NO losses.
Any surplus keep in a separate slush fund; under the bed preferably where no one can find it!
You then have the option of paying down debt because YOU decide to and NOT some silly bank deciding YOU should because they wish to reduce their loan exposure for whatever reason like 'changed market conditions!'
Such a policy works especially well in a low IR environment which will last for decades!
Of course your surplus cash could be used for further property purchase rather than pay down some silly capital amount to give you 100 quid extra cashflow per month!

Louis Parker

14:13 PM, 25th May 2013, About 10 years ago

I have always used IO mortgages as a way of getting my capitol investment back
if I decide not to sell a property and let it out instead .
I will then go forward and purchase another property in poor condition do the work to increase the value then take another IO mortgage to release the monies to go forward again.
I will sell if the market is right but using this method as a builder I can fund my own refurbs and not always needing to find work elsewere
One day I should have a cash pot to retire and slowly sell the remaining proprties as I require more monies

8:02 AM, 26th May 2013, About 10 years ago


Is it possible to change from repayment to IO only the loans, I'm new to this and bought the flat as I thought it was cheap at the time and then just kept my eye out and got then bought when I spotted something I thought was a bit of a bargin
i have
1 bed flat £38k repayment (£400 PCM on a long erm deal with housing association, I do electric and gas checks only, there is no agent as HA looks after everything) resale value £60k
3 bed £68k repayment (£550 PCM excellent tenant, via a letting agent at 8%) resale value £110k
3 bed £82,500 repayment (£550 PCM long term tenant via letting agent at 8%) resale value £120k
A house converted to two flats (no mortgage and currently carrying out the works, hoping in current market to reach £400 PCM ground floor and £450 PCM first floor, resale value around £110k once complete

Excellent site and opening my eyes as a newbie

8:04 AM, 26th May 2013, About 10 years ago

Forgot to say I maintain all houses as I am in the building trade as a qualified plumber

Mark Alexander - Founder of Property118

11:23 AM, 26th May 2013, About 10 years ago

@Ian - it very much depends which mortgage lenders are borrowing from. The only way to find out is to ask the question.

Something I have noticed is that lenders never refuse to switch from interest only to repayment but often refuse to switch the other way. You may be lucky.

The fact that lenders obviously prefer repayment mortgages might give you some inkling as to which party repayment mortgages best serve.

22:44 PM, 26th May 2013, About 10 years ago

To give the contrary opinion, all mine are on repayment. My LTV is now somewhere round about 30% and I expect all the mortgages to be paid off by the age of 50.

I could have generated a larger portfolio by maxing out the LTV, but then I'd be sitting here with large debts still outstanding. So, my method is less tax efficient on a cash flow basis, but if people need to sell in the long term to repay then there will be CGT issues. My plan isn't to sell, but have a reasonable unencumbered income as soon as possible.

Mark Alexander - Founder of Property118

6:38 AM, 27th May 2013, About 10 years ago

@Repaymentfan - When you say "all mine" that implies that you have more than one. Why don't you own less and have no mortgages at all?

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