Repayment Mortgages for Buy to Let
Are Repayment Mortgages For Buy To Let A Good Idea For Investors
Repayment mortgages for buy to let are just one of the options available to buy to let landlords, but are they really a good idea? Let's look at some of the advantages and disadvantages of repayment mortgages for buy to let. First of all, it is best to be clear about what repayment mortgages for buy to let really are. These are similar to repayment mortgages for residential property. When landlords get a mortgage they are usually given the choice of having repayment mortgages or interest only mortgages. The difference is that with interest only mortgages, only the interest on the loan is repaid, while with repayment mortgages for buy to let, both the interest and part of the capital are repaid. There are advantages and disadvantages to this repayment method.
One of the reasons for entering into BTL is to make some money from capital appreciation. To do that, landlords need to have some equity in the property. Unlike repayment mortgages, with interest only mortgages, since only the interest is being repaid, landlords' equity in the property remains the same as when they got the BTL mortgage. This means that, in contrast to repayment mortgages for buy to let, if they made a deposit of 20 per cent, this will be the equity they will have, especially near the start of the mortgage term. With time, that equity might increase if property prices rise, but there is no guarantee that they will.
Capital Repayment With BTL
Repayment mortgages for buy to let mean that some of the capital is being repaid. This means that with each payment the balance of the BTL mortgage that is accruing interest goes down, especially if the landlord has a flexible B2L mortgage deal. This also means that with repayment mortgages for buy to let, landlords start to increase their equity in the property straight away, which may be good news for the long term future of the investment.
Repayment mortgages may be a good option for new landlords or for those with very few properties. However, landlords with a large number of properties may find that repayment mortgages do not really suit their needs. This is because repayment mortgages for buy to let tie up some of their capital, leaving them less money to invest or to spend on maintenance of their B2L portfolio. For this reason, many professional landlords avoid repayment mortgages for buy to let in favour of interest only mortgages, keeping their capital liquid. Of course, should the property in a particular area not appreciate in value as expected, this could leave landlords with a large turkey - and not just at Christmas.
However, there is good news for landlords. There's a choice. It doesn't have to be either repayment mortgages or interest only mortgages. Many mortgage lenders now offer mixed repayment methods. This means that landlords can repay only the interest on a portion of their BTL mortgage and repay some of the capital on another portion. This allows them to keep some liquid capital while building up some equity in the property. And building up equity is one of the main advantages of repayment mortgages for buy to let.
