Should landlords choose a repayment or interest-only buy-to-let mortgage?

With an interest-only buy-to-let mortgage, you pay only the interest each month and then repay the full loan at the end. With a repayment mortgage, you pay off the interest and some of the capital each month, so you own the property outright by the end of the term. There's no single right answer. It depends on your strategy. 

What's the difference between interest-only and repayment?

Both are ways of paying back a buy-to-let mortgage. The difference is what your monthly payment covers.

With interest-only, you pay just the interest on the loan each month. Your payments are lower, but the amount you borrowed doesn't go down. At the end of the term, you still owe the full loan, and you need a way to pay it off.

With a repayment mortgage, sometimes called capital and interest, each monthly payment chips away at both the interest and the loan itself. Payments are higher, but by the end of the term you owe nothing and own the property outright.

Most buy-to-let mortgages are interest-only, but repayment is always an option, and for some landlords it's the better one. Picking the right type of mortgage comes down to what you want the property to do for you.

Interest-only buy-to-let: the pros and cons

The big draw is cash flow. Lower monthly payments mean more of your rent stays in your pocket each month, which is why interest-only has long been the default across the sector.

Pros:

• Lower monthly payments, which protect your cash flow
• More flexibility, since you can choose to overpay, save or invest the difference
• Can be more tax-efficient for individual landlords, because your whole payment is interest
• Easier to grow a portfolio, as lower outgoings free up cash for the next deposit

Cons:

• You still owe the full loan at the end, so you need a clear plan to repay it
• You don't build equity through payments, only through any rise in the property's value
• You're exposed if prices fall, because the debt stays the same even when the property is worth less

Repayment buy-to-let: the pros and cons

Here, you're steadily buying the property outright. It costs more each month, but you end up owning the property outright with no mortgage on it.

Pros:

• You own the property outright at the end, with no loan left to clear
• You build equity steadily, whatever happens to house prices
• Less risk over the long term, as your debt shrinks year by year
• A simpler exit, since there's no looming balance to repay

Cons:

• Higher monthly payments, which eat into your rental profit
• Weaker cash flow, leaving less spare each month
• Less tax-efficient for individual landlords, as the capital part of your payment gets no tax relief
• Harder to expand quickly, because more of your money is tied up in payments

Interest-only vs repayment: side by side

Here's a quick example of what this could look like in real life. 

On a £150,000 loan at 5.5% over 25 years, interest-only costs around £690 a month. A repayment mortgage on the same loan costs around £920 a month, roughly £230 more. 

Over a year, that's about £2,760 more out of your pocket. But at the end of the term, the interest-only landlord still owes the full £150,000, while the repayment landlord owes nothing and owns the property outright. That's the trade-off in a nutshell: cash flow now, or ownership later.

How your choice affects what you can borrow

There's another angle worth knowing. Lenders work out how much they'll lend against the amount of rent your property will earn, and they usually want that rent to cover the mortgage interest by a set margin. 

Because interest-only payments are lower, they can make the sums easier and, in some cases, let you borrow a little more. Having to make higher payments can tighten that calculation. 

It's not the main reason to choose one over the other, but it's worth factoring in if you're stretching to make a purchase work.

Working out which is right for you

There's no right or wrong answer, but it’s important to know what each option means to help you make the right decision.

Interest-only tends to suit you if:

• Cash flow is your priority, now or in the future
• You're building a portfolio and want to free up money for deposits
• You have a clear plan to repay the loan, whether that's selling, savings or investments

Repayment tends to suit you if:

• You want to own the property outright, often for income or security in later life
• You're happy to trade monthly profit for long-term equity
• You'd rather not have a large balance hanging over you at the end

Many landlords mix the two across a portfolio, interest-only on the properties they're holding for growth, repayment on the ones they want to own outright in time. There's no rule that says every property has to work the same way.

Speak to an adviser

Choosing between interest-only and repayment isn't just about the monthly cost. It's about the strategy behind your investment. An adviser can talk through your buy-to-let mortgage options, weigh up the trade-offs for your situation, and find a deal that fits your plans.

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