Buy-to-let Mortgages: What Kent Landlords
Need to Know

In this three-minute read,
we compare the different types of buy-to-let mortgages.

When choosing the right buy-to-let mortgage, landlords face a
key decision: go with an interest-only deal or opt for a capital repayment
arrangement.

Both options have their pros and cons. Let’s take a closer look.

Interest-only mortgage

Your payments only cover the interest on the loan and have no
impact on the capital.

Pros

1)
Lower repayments

Your
monthly repayments are lower than that of an equivalent capital repayment
mortgage.

For
example, with a 25-year interest-only mortgage of £200,000, monthly repayments
would be £573 (4.45%, fixed for three years). With a similar capital repayment
mortgage, you’d pay £996 a month*. That’s a difference of £423 a month.

2)
Less financial
stress
in between tenancies

If
the property is vacant for any reason, it will fall on your shoulders to cover
the repayments. Lower repayments equal less stress.

3)
Bigger monthly income

As
your mortgage repayments are lower, less of the rent goes to your lender.
Instead, it winds up in your pocket.

4)
More flexibility

You
can spend this extra cash on the upkeep and improvement of the property or
divert it to other investments.

5)
Sell and make a profit

If the property appreciates in value over time, you
can sell up and make a tidy profit.

Cons

1)
You won’t own the property

As
you won’t be repaying the capital loan, you’ll still owe a substantial sum at
the end of the mortgage. (Although you can sell the property, pay this debt,
and hopefully still be ahead.)

2)
The lender earns more

You
pay more interest to your lender over time compared to a capital repayment
mortgage. This is because you never reduce the size of the capital loan, so the
interest charges never reduce.

3)
Risk of negative equity

Historically,
property prices have been on an upward trajectory – last year, they grew in the
UK by a whopping 8.5% – so the risk of negative equity is low.

And
even if prices do drop, if you’re prepared to ride out market fluctuations,
then the long-term outlook is positive.

The
real risk comes if you need to sell in a hurry. If the property’s value has
dropped, you could end up owing more than the property is worth.

Capital
repayment
mortgage

Your monthly repayments cover the interest and gnaw
away at the capital.

Pros

1)
Ownership

At the end of the mortgage term, the property will
be yours.

2)
Less interest

You
pay less interest overall because the capital loan decreases – albeit gradually
– with every repayment.

Cons

1)
Higher
repayments

As
we mentioned earlier, the monthly repayments will be higher, and you’ll need to
cover them when the property is vacant.

Choosing the right option

There’s no one-size-fits-all solution, although most landlords
opt for interest-only**.

Landlords need to weigh up their circumstances and investment
goals carefully. For some, the priority is earning a monthly income; for
others, it’s working towards owning a property that they can pass on to their
children or even move into themselves.

For advice about making a buy-to-let investment work for you, contact
us here at CWB Property.

*Approximate figures only, based on a property worth £265,000.
Always seek independent financial advice.

** National Landlords Association