Find interest-only buy-to-let mortgages

Rate Product Monthly cost LTV Lender fee APRC
1.34% then 5.00% Fixed for 26 months Fixed for 26 months £111 60% £2,178 4.70% Enquire
1.43% then 4.49% Fixed for 26 months Fixed for 26 months £119 60% £2,525 4.30% Enquire
1.49% then 5.00% Fixed for 26 months Fixed for 26 months £124 60% £1,178 4.60% Enquire
  • Comprehensive product search for a great deal
  • Decision in principle often within two hours

Features of an interest only mortgage

  1. If you choose an interest-only mortgage you will repay only the interest accrued on the loan balance each month. The loan balance, or principal, will not reduce for the duration.
  2. This means your monthly payments will be cheaper. But once your mortgage term comes to an end, the full principal amount will become due. You must make separate provisions to repay this in full.

The Council of Mortgage Lenders (CML) believes that around three quarters of new buy-to-let loans issued are on an interest-only basis.

What are the benefits of an interest-only mortgage?

  • Cheaper repayments mean more monthly cash flow, which you can reinvest to grow the value of your portfolio. Cash is much more accessible than equity in a property.
  • In periods of inflation, the real value of your debt depreciates over time.
  • Most buy-to-let loans have overpayment facilities. This gives you the flexibility to reduce some of your debt when you are able, without committing to regular capital repayments.
  • Depending on your tax status, you may be able to claim relief or a reduction for your mortgage interest. (See below.)

Extra cash flow allows you to prepare for emergencies

Contingency funds are crucial for landlords. It is your responsibility to pay for a lot of maintenance work and repairs in your property. You may also encounter periods where your tenant stops paying rent (arrears) or your property is empty (voids).

The extra cash flow afforded by an interest-only mortgage is very useful in this regard. By setting some aside each month, you will build a contingency fund that you can dip into during emergencies.

Operating income is necessary for any business, and buy to let is no different.

You need an exit strategy to make interest-only  work

Your ‘exit strategy’ is how you plan to repay your loan at the end of the term. Depending on your long-term goals, there are one or more ways to do this.

Some investors will sell their property. If its value has appreciated enough, they will be able to pay off the loan and still enjoy a lump sum return. (Remember that sales profits are taxable. Read our guide to capital gains tax for more information.)

On the other hand, some investors want an asset that they own outright. They might wish to pass on an unencumbered property to a family member, or boost their retirement income. These individuals will need to find the funds elsewhere.

They could come from bonds, endowment policies, equity or income from other properties, ISAs, pensions or savings. If your long-term goal is outright ownership, be sure to discuss your proposed exit strategy with your mortgage advisor to ensure they recommend the most suitable product.

Can you claim tax relief on buy-to-let mortgage interest?

As well as boosting your cash flow, interest-only mortgages can be tax efficient. This is because some landlords can claim relief or reductions on the tax they pay on their rental income.

If you invest through a limited company, all mortgage interest is tax deductible. For every pound your company earns, it will save 20 pence in corporation tax.

Finance cost relief is more complicated for private individuals. Until April 2017, all interest is deductible. After this date, the deductible portion will fall by 25% per year, until it reaches 0% in April 2020. Landlords will be able to claim a 20% reduction on the non-deductible portion.

See for a list of case studies that show how the change might affect you.

If you haven’t already, be sure to consult with a tax advisor to find out what effect the new tax rules might have on your business.

Interest only is higher risk, but can mean higher reward

The concept of risk and reward is central to investment. The higher the risk, the higher the potential gains or losses.

For example, consider a property that appreciates in value by 10%. How much that gain is worth in relative terms depends on how much the buyer has invested.

If the buyer bought the property outright, the return on investment would be 10% (10 ÷ 100 = 0.1). If they had put down a 50% deposit, they would have made a 20% return (10 ÷ 50 = 0.2). With an even smaller deposit of 25%, the return is 40% (10 ÷ 25 = 0.4).

Each time the equity halves, the potential return doubles. The same works the other way; a loss is larger in relative terms at higher loan-to-value (LTV) ratios.

Read more: Calculating your true rate of return

When you repay your mortgage debt, your risk lowers. You minimise your exposure to losses, but also reduce your potential returns. By minimising how much you invest, you maximise the amount you could earn.

Whether this is the right strategy for you depends on a number of factors. Your attitude to risk, circumstances and investment goals all play a part. When you apply for a mortgage with Commercial Trust, your advisor will take all of this into account and recommend a product that is most suited to you.

Talk to an advisor by calling us on the number above or enquire online today.

Enquire now