Buy-to-Let - Which Mortgage Is Right For You?
If you’re a new landlord looking to purchase your first buy-to-let property, you have two main choices if you wish to use a mortgage to finance your investment.
Choosing between interest-only and the standard repayment model needs careful consideration, so here’s a quick breakdown of the key considerations:
INTEREST-ONLY MORTGAGE
Interest only ‘does what it says on the tin.’
You service the interest over the duration of the loan without paying down the capital. This is the most popular choice for new landlords.
Because you are not paying down the capital, monthly repayments are lower leaving more cash to invest in refurbishment or growing your portfolio. Monthly rental income is also more likely to cover the cost of just the mortgage interest which will of course be a prerequisite of applying for the loan from the outset.
A smaller monthly financial obligation also provides greater resilience to void periods or difficult tenants unwilling or unable to pay their rent.
But What Are The Risks?
At the end of an interest-only mortgage term you will still have to repay the capital balance which is likely to be a significant amount of money. Potentially you may have to sell the property to repay the outstanding balance.
If you plan to sell your investments later and take advantage of the long-term capital growth then this may be a worthy strategy. If house prices increase, then you could realise a healthy profit in addition to the rental income you have enjoyed over the term of the loan which has helped to pay down the interest. If you are operating as an individual you can also set 20% of your interest costs against tax.
It is important to note that prices can down down as well as up so solely relying on the property market could easily be a risky strategy, but over time they have a good track-record of growth.
CAPITAL REPAYMENT MORTGAGE
If you rather not worry about the burden of repaying a large lump sum at the end of your mortgage term then a capital repayment mortgage may be the right choice for you.
Choosing this method of repayment means your monthly repayments will be higher as you will be paying off the mortgage capital and the interest at the same time. This does mean that you will not have to sell off any assets at the end of the term to settle your loan.
This is the right option to choose if you intend to leave a mortgage-free property to beneficiaries in your will.
CAN I SWITCH BETWEEN INTEREST-ONLY AND CAPITAL REPAYMENT?
It is possible to switch between interest-only and repayment mortgages. However, if you are within a fixed or discounted rate period this may not be possible during this period as this is dependent on the lender’s policy
In this situation it is always best to consult the lender. In any case you should be able to switch once your current deal expires.
In some instances, landlords on an interest-only deal may feel they would like to start paying off the capital to reduce their overall debt position which some lenders allow to a limit while withing the fixed or discounted rate period without any charges.
Alternatively, you may wish to move to an interest only deal to fund more purchases to ultimately grow the business.
Whichever route you choose it is vitally important that you get sound advice.
SO HOW CAN BROOKLYNS FINANCIAL HELP?
We will advise you on the options available that are bested suited to you. We are here to help you every step of the way Just give us a call 01628 564631 or email us info@brooklynsfinancial.co.uk for an initial chat or quote at no cost?
