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Yes. Most buy to let mortgages in the UK are arranged on an interest-only basis, and nearly every buy to let lender offers it. You pay the interest each month, the balance does not fall, and the loan is repaid in full at the end of the term, usually from the sale of the property. Lenders accept that plan for buy to let in a way they rarely do for a residential mortgage.
Why is buy to let usually interest only?
Two reasons, and they are linked. The first is the rental cover calculation. Before agreeing a loan, the lender works out a notional monthly payment on an interest-only basis at a stressed rate, then requires the rent to cover that payment by a margin, commonly 125% for a limited company or basic-rate taxpayer and 145% for a higher-rate taxpayer. The whole test is built on the interest-only figure, so the loan is designed around it.
The second is cash flow. A repayment mortgage on the same loan has a far higher monthly payment, and the extra comes straight out of the landlord’s margin. Interest only keeps the monthly outgoing low, which is why an interest-only mortgage is the norm for landlords rather than the exception.
Does every buy to let lender offer interest only?
Almost all do. Some price interest only and repayment the same, some offer part and part where a slice of the loan is repaid each month, and a few cap the loan to value lower on interest only. The wider criteria a landlord has to meet are on the buy to let mortgage hub. If you are remortgaging rather than buying, I have also covered how much equity you need to remortgage a buy to let.
Most buy to let lending is interest only because the rental cover test is calculated on the interest-only payment
Lenders usually accept sale of the property as the repayment plan for buy to let, unlike residential lending
The balance does not fall on interest only, so a £200,000 loan is still £200,000 at the end of the term
How does interest only compare with repayment in pounds?
Take a £200,000 buy to let loan over 25 years. On interest only, the monthly payment is the interest and nothing else. At the end of year 25 the balance is still £200,000 and it has to be repaid from somewhere.
On a repayment basis, each monthly payment includes interest plus a slice of capital. Across 25 years, clearing £200,000 works out at an average of £667 a month of capital on top of the interest, although the split is not even. In the early years most of the payment is interest, and the capital share grows as the balance falls. At the end of year 25 the balance is nil.
So the repayment borrower pays several hundred pounds a month more for the same loan, and in return owns the property outright at the end. The interest-only borrower pays less each month but more interest in total over the term, because the balance never falls and interest is charged on the full £200,000 every year.
Which figure matters depends on what the property is for. A landlord who needs the rent to produce a monthly surplus, or who is building a portfolio and wants the cash for the next deposit, is usually looking at the interest-only figure. A landlord who wants to own the property unencumbered by a set date is looking at the repayment figure, or at overpaying an interest-only loan when funds allow.
Does the rental cover test change between the two?
For most lenders it does not. The rent has to cover the notional interest-only payment by the required margin whichever repayment method you choose, so choosing repayment does not reduce the rent you need. What it does change is the real monthly outgoing, which is why some lenders look more closely at a landlord’s personal income on a repayment case. The full comparison, including what happens to the interest paid over the term, is in my guide to interest only vs repayment mortgages.
What do lenders ask about the repayment plan?
Every interest-only lender asks how the loan will be repaid, and for buy to let the answer is usually the sale of the property. That is accepted by the large majority of buy to let lenders without further evidence, because the property is an investment rather than the borrower’s home and selling it does not leave anyone without somewhere to live.
Residential lenders take a different view. Sale of the home is accepted only by some, usually with a minimum equity or minimum property value attached, and others want a separate vehicle such as an ISA, a pension lump sum or the sale of another property. That is the main reason interest only is common for landlords and comparatively rare for homeowners.
Other repayment plans a buy to let lender may accept are the sale of a different property in the portfolio, savings or investments, or a remortgage at the end of the term. The application form asks for the plan and the lender records it. Some lenders write to interest-only borrowers during the term to ask whether the plan is still in place.
What is the end-of-term risk?
The risk is simple. If the term ends and the £200,000 is not there, the lender expects it anyway. In a flat or falling market the sale may not clear the balance, and a borrower in their seventies may find a new mortgage harder to arrange than the last one. Lenders manage this with maximum ages at the end of the term and by asking about the plan up front. Borrowers manage it by not leaving the plan to the final year.
What I see in practice
A large share of the buy to let mortgages I arrange are interest only, and that is normal for the market. Lenders do ask about the repayment plan, and sale of the property is the answer I hear most often from clients and the one lenders most readily accept for a buy to let.
Speak to an expert
If you want to see the two monthly figures side by side for your own property, send me the purchase price, the expected rent and the deposit you have, and I will show you both.
When is repayment or part and part the better route?
Repayment suits a landlord who plans to hold one property into retirement and wants the mortgage gone before then, or whose rent comfortably exceeds the payment either way. Part and part splits the loan, for example £150,000 on interest only and £50,000 on repayment, so that a portion is cleared during the term without the full repayment cost each month.
There is a tax point. For a property held in a personal name, the interest is not deducted from rental profit but attracts a basic-rate tax credit, and capital repayments attract no relief at all. Paying down capital is therefore done from taxed income. In a limited company, interest is a business expense. How that lands for you is a question for an accountant, not for me.
Overpayments are the middle route. Most buy to let products allow overpayments of up to 10% of the balance each year without an early repayment charge, so an interest-only borrower may reduce the loan when the rent is strong and pay the minimum when it is not. The final choice depends on your income, your tax position and what the property is for.
Your home may be repossessed if you do not keep up repayments on your mortgage.
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