A 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.