Is interest only still right for you?

When you purchased your Buy to Let property, you may have chosen to take out an interest only mortgage – planning to sell the house at the end of your term to pay back your loan and generate surplus profit. 

Since the start of the economic downturn, the value of your property might have fallen so you should consider what effect this will have on your investment strategy. Your property could be worth less in the future than you hoped for, leaving you with less profit or even a shortfall on your mortgage.

With an Interest Only mortgage you are contractually obliged to repay the full amount you borrowed at the end of your agreed term, even if your property sells for less than the amount of your loan. That’s why it’s essential to consider whether an Interest Only mortgage is still the best option.

If you are currently generating surplus rent, it might be worth switching to a repayment mortgage now (on one or more of your properties) to help you meet your goals.

The benefits of a Repayment mortgage

With a Repayment mortgage your loan will be paid off at the end of your mortgage term. You will then own your property outright, so if you sell all of the money you generate is yours. This is especially beneficial if you are relying on property increases to boost your retirement income.

This type of mortgage also protects the equity in your property. Since your monthly payments cover the interest and ‘chip away’ at your outstanding balance, this reduces the Loan to Value (LTV) of your mortgage. Most Buy to Let lenders have now tightened their criteria and offer much more competitive rates if you have a lower LTVs.

You might have a low rate at the moment, but as interest rates are predicted to rise, it’s important that you are in a position to get a suitable remortgage deal with another lender if your rate becomes uncompetitive. Following nationalisation we cannot offer you new mortgage deals designed to retain your business.  However a Repayment mortgage could help you access the better deals for low LTVs in the future.

Switching to a Repayment mortgage

By switching to a Repayment mortgage now you can pay back the loan in small amounts over the remainder of your mortgage. The extra monthly amount you pay might be a small price to pay for peace of mind when your mortgage comes to the end of its term.

It’s an easy process, you just need to be sure you can afford the new monthly payments. As a general rule, the shorter the term the higher the monthly payments – but it will save you money over the course of your mortgage.

Repayment calculator

To understand how you might be affected by switching, put your details (outstanding loan amount, interest rate and remaining mortgage term) into our calculator.

Repayment calculator Launch Repayment Mortgage calculator.

By moving the slide bar you can change the length of your term to see the effect of switching to Repayment, compared with your current Interest Only mortgage. You should notice that your monthly payments will be higher, but you’ll have nothing left to pay at the end.

If the payments associated with switching to a Repayment mortgage are too high for you, don’t forget you can always make regular overpayments on your Interest Only mortgage. Find out more in the overpayment section of our website.

Please note – these figures are an illustration only and do not take into account changes in interest rates throughout the mortgage term. The total amount payable does not include any fees and charges that may also be applicable over the term or on redemption.

If you need any help with the calculator or you’d like to speak to us about switching to a Repayment mortgage just contact us. Please remember that all applications to switch are assessed on an individual basis.

What about the tax implications?

Some landlords have told us that they are reluctant to pay money off their Buy to Let mortgage (either by switching to Repayment or making overpayments) as it will mean paying extra tax.

You will only need to pay more tax if you’re making larger profits – if the net interest rate on the mortgage you pay down is greater than the net return you could receive.

It’s also worth remembering that your portion of the profit will always be larger than the portion you give to the tax man.

Also, you should remember that overpaying your mortgage reduces the interest you will pay on your mortgage. This can be more tax efficient for some people as you cannot be charged tax on the interest you save. You may however be charged tax on any interest you earn if you place the money in a savings account.

Repayment calculator

Your current mortgage

£

Flexible term

months

The maximum term available to you is your current mortgage term.

Calculation results

Interest OnlyRepayment Mortgage
Current termCurrent termChosen term
Monthly Payment
Total interest amount payable over term
Balance owed at end of term
Total amount payable over term (Capital plus Interest)
Saving in total amount payable compared to Interest-only n/a