Buy-to-Let Repayment Mortgages

If you’re looking at getting a mortgage for a buy-to-let property, you might be considering whether to go for a capital repayment method, or interest-only.

In this article we’ll be focusing on buy-to-let (BTL) capital repayment mortgages: what they are; how they compare to interest-only; and how to get one.

What is a buy-to-let repayment mortgage?

With a capital repayment mortgage (often just called a repayment mortgage), your regular monthly repayments pay off both the interest and a portion of the capital borrowed.

This means the amount you owe decreases over the term of the loan, and at the end you own the buy-to-let (BTL) property outright, with no further debt outstanding.

Traditionally, when you take out a mortgage on a buy-to-let property, it’s arranged on an interest-only basis, where you only pay the interest element each month during the term and the capital is repaid as one lump sum at the very end, using a standalone repayment vehicle.

Try our mortgage calculator below to compare how your repayments might look for an interest-only buy-to-let mortgage versus a capital and repayment BTL agreement.

How to get a buy-to-let repayment mortgage: a step-by-step guide

If you’re interested in getting a repayment mortgage to buy a rental property, there are a few simple steps you can take in order to make the process much more straightforward.

Here’s how we recommend you do this:

Step 1. Do your research

Have you decided which property you want to buy? If not, think about how much of a deposit you can afford – see ‘Deposit requirements’, below. (And don’t forget, if you already own a property you’ll have to pay a higher rate of stamp duty when you buy another one.)

If you have a property in mind, think about how much rent you’ll be able to collect from it.

You’ll need at least enough to make the mortgage payments every month – and usually quite a bit more, depending on your mortgage lender.

Take a look at the ‘Income requirements’ section below to find out more.

Step 2. Check your credit score

It’s not impossible to get a BTL mortgage with bad credit, if you use the right broker.

But your credit history will affect the pool of mortgage lenders you can choose from.

So, it’s a good idea to download your credit reports beforehand, and correct any inaccuracies.

Step 3. Speak to an experienced buy-to-let mortgage broker

BTL repayment mortgages are much less common than interest-only, so it’s best to use an experienced broker who specialises in this niche area of lending and can find you the best deal to suit your circumstances.

Our free broker-matching service is designed to introduce you to an expert in the specific area where you need assistance.

If you get in touch we can arrange for a broker we work with to contact you straight away.

Benefits of using a repayment method for a buy-to-let property

Whilst most lenders tend to opt for the interest-only repayment method, there are a number of benefits to choosing capital and repayment, such as:

• Repayment mortgages are less expensive overall. You’ll pay less interest, because the amount you owe will decrease with each monthly payment. This means a greater return on your buy-to-let investment.
• Similarly, later on in the mortgage term, you’ll have a smaller outstanding balance, which means you could access better rates with lower interest if you choose to remortgage
• At the end of the term you’ll own the property outright, so you won’t have to worry about having enough capital in the property or elsewhere to repay the mortgage – perfect if you want to sell the property or pass it on to your children

Things to consider

Higher monthly repayments can put more pressure on your abilities, as a landlord, to find tenants willing to pay enough rent to cover your mortgage.

This could also restrict your ambitions for expanding your buy-to-let portfolio, if affordability becomes an issue.

Whereas, with an interest-only option, you only have the monthly interest payments to cover, and can use any profits made from the sale of the property to cover the outstanding mortgage debt at the end of the term.

Eligibility Criteria

Mortgage lenders tend to be more cautious when assessing applications for BTL mortgages than for residential mortgages.

Most lenders will require you to own your own home (either outright, or with an existing mortgage).

You’ll usually need to be over 21 years old. And many lenders will set an upper age limit too – usually stipulating that you can’t be older than 70 or 75 when the mortgage term ends.

The usual eligibility factors for any mortgage will also apply: lenders will look at your credit history, the property you’re seeking to buy, your deposit and your income.

The latter two are particularly important when it comes to BTL repayment mortgages – see below.

Deposit requirements

Any buy-to-let mortgage – interest-only or repayment – generally requires a larger deposit than buying residential property.

This is particularly the case with repayment mortgages, as lenders will want to be reassured that you can afford the higher monthly payments.

Lenders will usually ask for 20-25% of the property’s value, although some lenders may ask for a higher amount, sometimes up to 40%.

As always, the larger deposit, the better the interest rates you could access.

Income requirements

Mortgage lenders will want to know about the expected rental income from the property, and also about your income from employment earnings or any other sources.

How much rental income is needed

The amount you can borrow with a BTL mortgage depends on how much rent you expect to receive.

Most lenders now expect you to generate rental income equivalent to between 125%-145% of the mortgage repayments.

So if your monthly mortgage payment was £1000, you’d need rental income of between £1,250-£1,450.

Are there any personal income requirements?

Although the mortgage will mostly be based on the rental income of the property, lenders will also want to know about your employment earnings – and many will set a minimum income level.

This is particularly important if you’re hoping to use your other disposable income to top up the rental yield if there is ever a shortfall. This is known as ‘top-slicing’.

What are the typical early repayment charges?

Most BTL mortgages, like residential mortgages, come with early repayment charges – usually between 1% and 5% of the outstanding mortgage balance.

This can make it difficult to sell the property in the first few years and make a profit, for example. But there are some lenders who don’t charge an early repayment fee on some of their products.

Find a broker who specialises in BTL repayment mortgages

BTL repayment mortgages are relatively unusual and not every lender offers them. So to make a successful application, you’ll need a mortgage broker who handles all kinds of BTL mortgages every day.

We work with brokers who are experienced in supporting landlords. Make an enquiry or call us today on 0808 189 0463, and we’ll match you with the perfect broker to help you.