A lot of new investors ask this question when deciding the best method of repayment for their buy to let mortgage but which type of repayment method is best for you? The Mortgage broker has provided you with the following points of interest to help you decide.
According to The Mortgage Broker (St Neots) Ltd, 78% of investors since Jan 2012 choose an interest only mortgage for a variety of reasons including:
The ability to provide a higher income for themselves as the rental vs. the mortgage payment is greater on an interest only mortgage compared to a repayment mortgage allowing a greater income amount to be drawn. If your rental is £750 per month and an interest only mortgage is £500 per month and the repayment mortgage equivalent is £650 per month you have an additional £150 per month of income
By having an interest only mortgage the monthly commitment is lower than that of a repayment mortgage allowing the investor a bit more breathing space at times of rental voids or in times of personal hardship. As per the example shown above would you rather be committed to a £500 per month mortgage payment or a commitment of £650 per month?
By having an interest only mortgage you maintain your outstanding mortgage balance rather than reducing it as you would with a repayment mortgage. The benefits of maintaining the higher mortgage balance over a reducing mortgage balance is the ability to offset the higher mortgage cost against your rental income and in effect lowering your potential income tax bill. With a repayment mortgage you are constantly reducing your outstanding mortgage balance which means the interest part of your mortgage payment is reducing. Your income tax liability is due on the amount of rental you receive less any interest payments so if your interest only payments are getting lower your potential tax liability is getting higher.
Some lenders work out their rental income calculation based on the actual mortgage payment whether this payment is on an interest only mortgage or a repayment method. With an interest only payment a greater choice of mortgage lenders will be available to the investor based on the rental calculation criteria.
The benefits of a repayment mortgage on your buy to let.
Greater lender choice
Some buy to let lenders will only offer a buy to let mortgage if you take out a repayment mortgage. Therefore by choosing a repayment buy to let mortgage will offer you a greater choice of mortgage deals, mortgage lenders and mortgage products.
Less risk going forward
By maintaining a repayment mortgage you ultimately reduce your mortgage balance over time. The benefits of having a lower mortgage balance when compared to an interest only static mortgage balance may offer some protection against potential falling house prices. You may also get a better choice of mortgage deals going forward as your loan to value (LTV) drops and an increase in your equity is never a bad thing.
It’s an emotional thing!
Some investors simply don’t like their mortgage /debt remaining at the same level and like to see this debt reduce over time. Forget everything else, if you are one of those investors a repayment buy to let mortgage is the one for you and the benefits of an interest only mortgage won’t hold any appeal in the repayment or interest only discussion.