Repayment Methods – Repayment vs. Interest only.
When it comes to BTL Mortgages you have 2 repayment methods; Repayment and Interest only. Let’s take a look at both, compare the differences and see which one is preferable.
Interest-only
So, let’s say you borrow £100,000 over a 25-year term at a rate of 3.5%. in this instance, you would pay £291.66 per month as a mortgage payment. After the 25 year term, however, the original £100,000 balance has not changed as your monthly mortgage payments have been interest only.
This means that lenders will require a credible repayment vehicle in place. For BTL Investment property “sale of the property” will be a sufficient method (but yes, you can remortgage before the end of the term).
Repayment
Again, you are taking a mortgage over a specified term. However, now you are paying the amount borrowed plus interest to the lender. This means that on a £100,000 repayment over a 25 year at a rate of 3.5% your monthly payment would be £501 per month. After the 25-year term, you would have no outstanding balance and you would have repaid the original £100,000.
Now, which one is more beneficial for BTL? It depends on attitude. Property is a great asset class due to 2 factors:
- Cashflow
- Capital Appreciation
You can still benefit from both factors interest-only and repayment. However, if you are looking to maximise cash flow, interest-only is the method you should choose as the mortgage payments would be less (as shown above). And you would still benefit from capital appreciation.
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