Switching to a repayment mortgage

If your Buy-to-Let mortgage is on Interest Only, it is worth considering whether switching to Repayment would be sensible to help achieve your long-term investment objectives.

With an Interest Only mortgage, your monthly payments only cover the interest on the amount you've borrowed. Your payments are not reducing the balance of your loan and you will need to pay back this amount in full at the end of your term. You should therefore have a robust repayment plan in place to ensure you can make this payment when the time comes.

A Repayment mortgage works differently - your monthly payments cover the interest on the amount you've borrowed and also gradually reduce the balance of your loan. So as long as you stay on track with your monthly payments, your mortgage will be completely paid off at the end of the term and any proceeds from the sale of your property will potentially be yours.

Switching to Repayment will increase your monthly payments, but the additional amount could be less than you think and might be affordable if you are currently generating surplus rent.

What are the potential benefits?
  • House price rises are far from certain, so paying off the balance you owe over your mortgage term could be very important if you are relying on the sale of your investment property to boost your retirement income.
  • Since your monthly payments gradually reduce your outstanding balance, this could reduce the Loan to Value (LTV) of your mortgage. Most Buy-to-Let lenders have tightened their criteria and currently offer more competitive rates on mortgages at lower LTV levels.
  • Interest rates are likely to rise at some point. Following nationalisation we cannot offer you a new mortgage deal so your interest rate with us may also rise too. It could benefit you to be able to remortgage elsewhere if your rate with us becomes uncompetitive. Switching to Repayment now could be a prudent way to increase your chances of finding a better deal from another lender in the future.
Are there any tax implications?

Some landlords have told us that they are reluctant to pay money off their Buy to Let mortgage by switching to Repayment as it will mean paying extra tax.

However, you will only need to pay more tax if you are making larger profits, and it’s also worth remembering that your portion of the profit may always be larger than the amount that you give to the tax man.

See the impact on your mortgage

Our Repayment Calculator illustrates how much you would need to pay each month to switch from an interest only to a repayment mortgage.

Simply enter your details (outstanding loan amount, interest rate and remaining mortgage term) and compare the different monthly payments. Although your monthly payments will be higher, you’ll have nothing left to pay at the end of your mortgage term.

Please note – these figures are an illustration only and do not take into account changes in interest rates throughout the mortgage term. The total amount payable does not include any fees and charges that may also be applicable over the term or on redemption.

If a full switch to a Repayment mortgage costs too much, then you may consider changing just part of your mortgage to Repayment, whilst keeping the remainder as Interest Only. This is called a Part and Part mortgage.

Switch part of your mortgage to Repayment

By switching part of your mortgage to repayment, the increase in your monthly payments will be less than with a full switch, so this option could be more affordable. If your rental income increases in the future, you can also increase the portion of your mortgage on repayment, and 'step up' your monthly payments. This will in turn increase the amount of your loan that you'll be gradually paying off.

With a Part and Part mortgage, whilst you won't pay off your entire loan over the term of your mortgage, you will reduce the balance you owe. This could help if you are facing a shortfall from an investment plan, or if you eventually sell your property in the future for less than you expect.

Alternatively, if you are thinking of remortgaging with another lender, reducing your balance should increase the equity in your property and potentially give you more remortgage options.

Please contact us to discuss how Part and Part may work for you. We can then provide you with details of how much extra you would have to pay each month.

Make the switch now

To discuss switching all, or part, of your mortgage to Repayment, please contact us and we will be happy to help. All applications to switch are assessed on an individual basis.