When borrowing money on a buy-to-let basis, there are two ways in which you can repay the loan. We will discuss these below.
With interest-only mortgages, as the name implies, only the interest on the loan is paid each month; not the capital borrowed. At the end of the chosen mortgage term, a landlord would still therefore owe the lender the total amount borrowed. At the end of the mortgage term they would therefore need to be in a position to repay the original loan.
Many landlords choose to invest in property using an interest-only mortgage, due to the lower costs, planning to simply sell at the end of the term, at which point they will pay any capital gains tax and retain any equity. The interest-only cost of the mortgage is tax-deductible.
Not all landlords want to sell their properties at this point, however and if they wanted to keep the rental property they would need to have a plan in place to be able to repay the borrowing.
Taking out a repayment mortgage will cost more each month as the repayment amount is made up of both on the loan and paying back a portion of the amount borrowed. At the end of the mortgage term, both the interest and the full amount of the borrowing are repaid in full.
We would always advise on speaking to an accountant regarding the tax implications of your decision to invest in a property. Once you know what your investment objectives are, we can then help you find the right type of mortgage.
Because mortgage interest payments can be offset against tax, most landlords who want to achieve good rental income and maximise the return on their property investment, take into account the tax benefits of a mortgage and tend to take out some mortgage borrowing over the long term.
With an interest-only mortgage, a landlord would make more income month to month, however they would never repay the mortgage whereas with a repayment mortgage, the landlord owns the property outright at the end of the mortgage term. However, many investors are looking to focus on the income that the property will generate and an interest only option may be best in this case.
If it’s capital growth in the value of a property and selling to yield a lump sum in the future that interests you most, or perhaps wanting to pass on a fully-owned asset to your beneficiaries, a repayment mortgage may prove to be the right choice for you.
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Your home may be repossessed if you do not keep up repayments on your mortgage.
There may be a fee for mortgage advice. The actual amount you pay will depend upon your circumstances. The fee is up to 1% but a typical fee is 0.3% of the amount borrowed.
There is no guarantee that it will be possible to arrange continuous letting of the property, nor that rental income will be sufficient to meet the cost of the mortgage.