Are buy to let mortgages interest only?
When you’re looking to invest in UK property, understanding how buy to let mortgages work is essential. One of the most common questions we hear from new and experienced landlords alike is whether buy to let mortgages are interest only.
The short answer is that while they don’t have to be, most buy to let mortgages in the UK are indeed set up on an interest only basis. In this guide, we’ll explain how these mortgages work, why they’re popular with property investors, and what you need to know before choosing this option.
How Interest Only Buy to Let Mortgages Work
With an interest only buy to let mortgage, your monthly payments cover just the interest charged on the loan, not the capital (the amount you borrowed). This means your monthly outgoings are lower than with a repayment mortgage, where you’d be paying both interest and capital each month.
For example, on a £200,000 interest only mortgage, you’ll only pay the interest each month, while the £200,000 capital remains unchanged throughout the mortgage term. At the end of the term – often 25 years – you’ll need to repay the full £200,000 borrowed.
This differs from residential mortgages, where repayment mortgages (where you gradually pay off the capital) have become the standard. About 80-85% of buy to let mortgages in the UK are arranged on an interest only basis.
Why Most Buy to Let Mortgages Are Interest Only
Interest only mortgages align well with investment strategies. For landlords, property investment is often about balancing monthly rental income against expenses while building long-term capital appreciation.
The lower monthly payments of interest only mortgages mean more of your rental income is left over after paying the mortgage. This improves monthly cash flow and can make the difference between a property that generates positive monthly income and one that doesn’t.
Lenders also recognise that most landlords plan to either sell the property eventually or refinance, making interest only a practical option for both parties.
Benefits for Landlords
The main advantage for landlords is improved cash flow. With lower monthly mortgage payments, you’ll have more rental income available each month. This extra money can be used to:
- Build a fund for property maintenance and void periods
- Save towards deposits for additional properties
- Invest elsewhere to diversify your portfolio
- Cover increased costs during periods of higher interest rates
Many landlords also find that interest only mortgages offer more flexibility, particularly if they’re building a property portfolio as part of a longer-term investment strategy.
Repaying the Capital
The most common question about interest only mortgages is: “What happens at the end of the term?” You’ll need a clear plan for repaying the original loan amount when the mortgage ends. Common approaches include:
- Selling the property – using the proceeds to repay the mortgage
- Refinancing onto a new mortgage – extending the borrowing period
- Using other investments you’ve built up over the mortgage term
- Selling other properties in your portfolio
Most landlords who use interest only mortgages view the properties as long-term investments. They expect property values to rise over time, providing equity growth that can be accessed when selling.
It’s worth planning your exit strategy from the start. Property markets can change, and what seems like a sound plan today might need adjusting as market conditions evolve.
Getting an Interest Only Buy to Let Mortgage
To qualify for an interest only buy to let mortgage, lenders will look at:
- Rental income – most want the expected rent to cover the mortgage payment by 125-145%
- Deposit size – you’ll need at least 25% of the property value as a deposit
- Your credit history and age
- Your experience as a landlord (for some lenders)
The rental income requirement is calculated using a “stress test” where lenders check if the rent would cover the mortgage payments even if interest rates rose significantly.
If you’re a portfolio landlord (with four or more mortgaged properties), you may face additional checks on your entire portfolio’s performance.
How a Mortgage Broker Can Help
Getting the right buy to let mortgage can be complex. Lender criteria vary widely, and what works for one landlord might not work for another. A mortgage broker who specialises in buy to let can:
- Search the whole market to find the most suitable deals
- Recommend lenders who match your specific situation
- Help you understand how the rental calculations work
- Guide you through the application process
- Suggest appropriate repayment strategies
At Drake Mortgages, we work with landlords at all stages – from first-time investors to experienced portfolio builders. We can help you understand whether an interest only mortgage is right for your investment goals and find lenders who offer terms that work for your situation.
Buy to let mortgages come with unique considerations, and getting expert advice can make all the difference to the success of your property investment.