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Is it Better to Buy-to-Let on Interest-Only?

Learn about why investing in an interest only buy to let mortgage may be beneficial for homeowners looking to invest in rental properties.

Is it Better to Buy-to-Let on Interest-Only?

Benefits of interest-only mortgages for homeowners can be numerous. It can help you keep your overheads lower and finance other properties. Having less to pay each month can provide a safety net for times when there is no rental income. You can make a profit by selling the property, in addition to covering the loan amount.

Most purchase-to-rent mortgages only have interest because you pay the interest and nothing else. If you do, your monthly payments will be lower, which means that your profit margins for the rent received are higher than if your mortgage were on a repayment plan. Interest-only mortgages can be a blessing for buyers able to make larger payments in the future in exchange for short-term savings. Most homeowners prefer interest-only mortgages because they keep their overheads low.

Over time, the loan can be repaid by selling the property (hopefully at a profit), so as long as you can afford the initial deposit, the best thing to do is to pay only the interest. You'll likely find that an interest-only BTL mortgage meets the same requirements as any other buy-to-rent mortgage criteria, and most lenders expect homeowners to prefer this option anyway. Most lenders require rental income to represent at least 125% to 145% of the interest repayments on a purchase-to-rent mortgage. An interest-only purchase-to-rent mortgage helps offset this risk to a certain extent, since your monthly payments to the lender are lower and, therefore, you won't have to find the funds for a higher-repayment mortgage every month you pay out of pocket.

However, since most homeowners invest in properties for the long term and expect to overcome the ups and downs, they often feel safer betting on purchase-to-rent mortgages that only pay interest. Currently, Barclays purchase-to-rent mortgage rates stand at 3% for a fixed term of two years if the loan-to-value ratio (LTV) is 60%, and increase to 3.85% for a two-year tracker with an LTV of 75%. When it comes to the deposit you'll need, you're probably looking for a maximum loan-to-value ratio of 75 to 80%, as is common in purchase-to-rent mortgages, so you'll have to deposit between 20 and 25% of the deposit. The strength of your application, and an important factor in getting a purchase-to-rent (BTL) mortgage in the first place, will depend on whether your buy-for-rent property will generate a monthly income greater than the amount you have to return to the bank.

The interest rates for repayment of purchase-to-rent mortgages are about the same, but remember that the amount of interest you pay will decrease if you are paying a repayment, but it will not decrease if you only pay interest. Most lenders that offer purchase-to-rent mortgages offer repayment and interest-only options, however, there are some that don't sanction repayment mortgages at all. A survey conducted by the NLRA (acronym for the National Homeowners Association) reports that most homeowners choose purchase-to-rent mortgages that have only interest when buying their investment. Buying to rent is an investment vehicle, and when it comes to properties, anyone who invests expects to see the value of their home increase.

If you decide to apply for an amortization mortgage for your purchase for rent, the profit margins will be tight and possibly even non-existent.

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