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Repayment Mortgage for Buy to Let

Repayment Mortgage for Buy to Let

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Interest-only BTL mortgages are the most common type of financing for investment property buyers and landlords. However, more and more investors are considering repayment mortgages as a viable alternative.

This alternative type of mortgage is referred to as a buy-to-let repayment mortgage or a buy-to-let repayment home loan, and in essence, is the same as a standard residential repayment mortgage albeit applying to an investment property.

Here we review the pros and cons of choosing a BTL repayment mortgage to help you make an informed decision. For tailored advice and recommendations about your financing options, call Revolution Finance Brokers on 0330 304 3040 or drop us a message at info@revolutionbrokers.co.uk. 

What Is a BTL Repayment Mortgage?

There are two different types of mortgage finance. Capital repayment means that the mortgage interest is paid monthly, with a proportion of the original borrowing amount. Over time, the capital owed against the property reduces, and the regular interest payments decrease.

An interest-only mortgage means that the monthly repayment is only for the interest payable on the original loan value. At the end of the loan term, the initial capital value remains payable and needs to be repaid by selling or refinancing the property.

For example, if you were to secure a £200,000 repayment mortgage over a 25-year term with a 4% interest rate when you reach the twentieth year of the loan, your outstanding balance will be £57,304. By the Twenty-fifth year, the loan will be repaid in full.

On an interest-only mortgage, when you reach year 25, you will still owe the full £200,000 you borrowed.

Benefits of BTL Repayment Mortgages:

  • When you reach the end of the loan term, you own the property entirely with nothing left to pay.
  • Over time, your repayments pay back more and more of the capital amount, and so you can consider remortgage options with more attractive interest rates.
  • As the capital balance reduces, so too does your interest charge, meaning that overall you pay less interest.

Downsides of Choosing a Repayment Mortgage for BTL:

  • Your monthly mortgage payments will be higher than for interest-only, and so you need to be able to meet higher affordability criteria.
  • Repayment BTL mortgages are usually only available through specialist lenders.
  • The total loan amounts may be smaller than you might achieve through an interest-only mortgage.

Choosing Between Interest-Only and Repayment BTL Mortgages

The right type of mortgage for you depends on lots of variables, such as your affordability, how much deposit you have to invest, and your expectations for your investment property.

Interest-only remains popular given the lower monthly payments, which are easier to cover, mainly when the property is vacant.

However, the main disadvantage of interest-only is that you must know how you will repay the original loan when the mortgage term reaches an end. You will also find that the total interest paid on an interest-only mortgage is almost always higher than for a repayment mortgage.

Comparison: Interest-Only vs Repayment

Let's consider a mortgage over 25-years to purchase an investment property costing £160,000, with a 4% interest rate.

On interest-only, the monthly payments would amount to £533.33, and the total interest payable over the term £159,999. Remember that the capital of £160,000 will also need to be repaid, making the total payments £319,999.

In comparison, a repayment mortgage under than same terms would command a monthly payment of £844.54, meaning a higher amount per month. However, the total payable, including all interest and capital, would be £253,362 over the 25-years.

 

Monthly Cost

Total Interest

Total Mortgage Cost

Interest-Only

£533.33

£159,999

£319,999

Repayment

£844.54

£93,362

£253,362

This is an example purely for illustration; to understand the rates and terms you might be offered, it is always advisable to speak with a specialist BTL mortgage broker such as Revolution Finance to compare the best rates and deals available on the market.

Stamp Duty Charges on BTL Properties

UK property purchases incur a stamp duty charge - which is a tax based on the value of the property. In addition to the stamp duty, investors purchasing a second home must pay an additional 3% tax on any properties purchased costing over £400,000.

The below rates are accurate following the Summer Statement in July 2020 and are valid until 31st March 2021 depending on any future changes:

Property Value

Stamp Duty

Second Home Duty

Up to £500k

0%

3%

£500,001-£925,000

5%

8%

£925,001-£1,500,000

10%

13%

£1,500,001 and above

12%

15%

Applying for a Repayment Buy-to-let Mortgage

Every lender works to their eligibility criteria, and it can be more challenging to secure a repayment BTL mortgage since the affordability criteria for higher monthly payments is more stringent.

Using an experienced broker is the best possible way to secure the funding you need at competitive rates. The Revolution team can guide you through the pros and cons of all the newest mortgage products on the market, to identify the best mortgage options for your property investment.

When applying, a lender will need to consider several criteria to decide whether they can extend and offer, and against what terms:

  • Your income and affordability assessment
  • Your credit rating and history
  • The type of property you wish to purchase
  • Your employment and stable income
  • Any other relevant circumstances

Finding the Most Competitive BTL Repayment Mortgage Deals 

Every investor has a different set of circumstances, but typically the most appealing mortgage deals depend on the amount of deposit that you can put forward. For example, some lenders will consider an LTV ratio of around 80-85% with others considering as high as a 90% LTV.

There are also other factors to consider when comparing mortgage deals, or deciding which lender matches well with your needs:

  • Whether there are early repayment charges in place
  • What sort of fees are payable

To secure competitive pricing and terms to meet with your plans, get in touch with our team today, and we will identify the ideal mortgage solutions for you.

What Does Top-Slicing Mean in BTL Mortgages?

Top slicing is a practice whereby your personal income is leveraged to help you borrow a higher value on a BTL mortgage.

Most lenders will look at the potential rental income from your proposed property purchase. However, others will also take into consideration your personal income, which can help make up the difference if the rental isn't quite sufficient to cover the amount you wish to borrow.

This practice generally applies to applicants earning a high income.

Some lenders will allow personal income to be considered, and others will only be able to consider rental income in the affordability assessment process. Using top-slicing allows a property investor to purchase a property with a higher loan, and still offer a lower rental income to cover the repayments.

Early Repayment Charges on BTL Mortgages

Early repayment charges are incurred when you wish to repay or refinance a mortgage before the end of the term - and are common in BTL mortgages. However, working with a broker allows you the freedom to compare deals without this fee structure, giving you greater flexibility to switch lenders and take advantage of any new deals that come onto the market.

For example, if you decide to sell your investment property, or to resell following a renovation, you can do so without needing to pay fees to your mortgage lender for settling early.

Speak to Revolution Brokers about BTL mortgages with no early repayment charges for the ultimate in choice when it comes to your future property portfolio plans.

Securing a BTL Repayment Mortgage with Bad Credit History

Suffering a bad credit rating is relatively common amongst landlords, and is often caused by tenants falling behind with rent. As a BTL mortgage specialist, Revolution Brokers work with landlord across the UK to help them secure competitive mortgage lending despite their credit file.

Deciding on which mortgage is right for you depends on lots of elements, which we can discuss with you, including:

  • Your current credit score and rating
  • Any defaults or mortgage arrears on records
  • Whether you have been subject to any CCJs, IVAs or DMPs
  • Whether you have filed for bankruptcy in the past
  • Whether any previous properties have been repossessed

The length of time that has passed since is also an essential factor, and as your broker, we can negotiate with lenders on your behalf to achieve the funding you need. 

Using an Expert BTL Mortgage Advisor

Entering into any long-term investment is a financial decision that is best made with professional support and expert advice.

As a whole of market broker, Revolution has access to every deal, product and lender on the market, putting us in the position to broker unique deals tailored to your borrowing requirements.

Given us a call or drop us a message today, and once we know what sort of financing you need, will get to work putting a solution in place.

Check out our handy calculators

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FCA disclaimer

*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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