Borrowing Limits on Interest Only Mortgage Buy to Lets

The amount you can borrow depends on:

• Your income
• The anticipated rental income
• How much deposit you have available
• The type of property
• Your credit rating

Each BTL application will be considered on its own merits, for the lender to decide whether the investment is viable, and how comfortably you can make the interest payments.

Usually, the rental yield required for a property investment to be considered viable is around 125% of the mortgage payments.

For example, if you are investing in a property costing £100,000 at an interest rate of 5%, your monthly payment will be £417. To achieve the right level of affordability, the property will need to generate at least £521 in rent each month.

Lenders will look to assess the anticipated rental income to verify any estimates you have provided them with. As rental values can change over time, some lenders also look at income coverage ratios (ICRs) to calculate the amount of risk involved.

ICRs work n the same way - by calculating how easily the income generated from rent will cover the interest costs.

To find the right lender for you, and to work through the affordability criteria with confidence, give Revolution Brokers a call, and we can help with these calculations to ensure you apply to the right BTL lenders!

Personal Income and BTL Borrowing

Lenders primarily consider the projected rental income to decide whether to extend an offer. Some lenders will also consider your own income, mainly if the investment looks viable, but there is a shortfall between the anticipated rental cover, and what you need to borrow.

We work with specialist lenders who use a more tailored system to calculate the amount of lending they can offer, and the affordability of that lender, based on each applicant.

Deposit Requirements for BTL Mortgages

Buy-to-let mortgages usually require a higher deposit than you would expect to need for a residential mortgage. This is because the lending is higher risk, and so the maximum loan to value ratio (LTV) available is lower.

Most BTL mortgage lenders look for a deposit of around 25%, with an LTV ratio of 75%.

Revolution Brokers work with lenders who can offer a more generous LTV ratio of up to 80% depending on your experience as a landlord, so if you'd like to buy a new investment property but don't have a 25% deposit available, give us a call!

Choosing Between Repayment Terms or the Best Buy to Let Interest Only Mortgages

Both types of mortgages have advantages and disadvantages, so what works best for you will depend on your budget and circumstances.

With a repayment mortgage, your loan will have been repaid in full when the loan terms ends, whereas, with an interest-only mortgage, the total balance will remain outstanding.

However, the monthly costs of a repayment mortgage are always higher than for interest only.

As a comparison for a property costing £160k and charged at 4% interest:

	Total Mortgage Cost	Total Interest Paid	Monthly Repayment
Repayment	£252,316	£92,316	£841.05
Interest-Only	£326,175	£166,175	£553.92

Interest-Only Mortgage Exit Strategies

If you decide to use an interest-only mortgage to purchase an investment property, you will need to know how you are going to pay back the original loan value. This is often necessary before a lender can extend a lending offer to you.

Common ways to repay the capital balance on an interest-only mortgage include:

• Selling the property at the end of the mortgage term
• Repaying the balance with investments such as stocks or shared
• Remortgaging
• Using ISA savings

Should you be considering an interest-only mortgage and need help with your exit strategy, get in touch today, and we will work through the options with you.

Buy to Let Interest Only Mortgage Rates

Rates between lenders vary wildly and depend on multiple factors. As a whole of market broker, Revolution Finance works with a vast network of established UK lenders to compare and contrast the most attractive deals on the market to match with your financing needs.

Many of the mainstream high street banks offer interest-only mortgages and work with BTL landlords. However, it is crucial to compare the rates of interest and terms on offer to ensure you are getting the best value.

LTV ratios are also an important consideration and are crucial if you have a limited budget to pay a deposit from.

It is common for an interest-only lender to offer a fixed interest rated for around five years - but again, this depends on the circumstances and what sort of lending is best suited to your property portfolio.

Taxation and BTL Mortgages

From 2020, there are changes to be aware of when it comes to taxation for landlords. As of July 2020, the Stamp Duty threshold has risen to £500,000 - although landlords and investors purchasing a second property are still liable to pay the additional duty for a second home.

For more information about Stamp Duty for BTL landlords, take a look at our guidance page explaining the rates and thresholds in more detail.

There are also changes in the tax relief available for landlords. In the past, the interest costs associated with a BTL mortgage could be dedicated from declared rental income, thus reducing the tax liability. Now, this is deductible as an expense, which means that investors with more significant properties or levels of income may fall into a higher tax bracket.

For expert support and guidance with every aspect of securing a competitive buy-to-let mortgage and negotiating the most tax-efficient business structures, give Revolution Finance Brokers a call on 0330 304 3040 or drop us a message at info@revolutionbrokers.co.uk.