Buy-to-let mortgage repayment options
There are two main parts of a mortgage which need repaying: interest on the loan, and the loan itself. How you decide to repay the mortgage is dependent on what your aims are as a landlord, and the different tax implications.
If you want to end up owning the property outright, perhaps with the intention of passing it on to your beneficiaries, then a repayment mortgage will probably be the best option.
However, if your sole intention is to generate an income from this investment, then the interest-only mortgage will probably be the best option.
Repaying Interest-only mortgages
Interest-only mortgages are cheaper in the short-term, and are the more popular choice because many landlords plan to sell the property at the end of the mortgage term to repay the original loan, rather than keeping it.
It means that each month, only the interest needs to be paid, and none of the capital that you borrowed. When the loan matures, you will owe the entire loan amount, but often this is simply done by selling the property and using the money from the sale. However, never just assume you will definitely be able to repay the loan this way, because house prices may fall and leave you struggling.
It should be noted that the interest-only cost of the loan is tax deductible.
Repaying repayment mortgages
If you have a repayment mortgage then you will have higher costs each month, because you are paying the interest and a chunk of the loan. The main advantage of this is you end up owning the property outright once the loan matures.
The repayments are structured so that borrowers end up paying off the full amount (both the interest and the capital) by the end of the term. The repayment amount gradually reduces during the term, as the borrower’s equity in the property rises.