Buy to let mortgage is interest only the best option for you?

The majority of landlords use an interest only mortgage for two reasons, firstly it maximises monthly cash-flow and, secondly, it is tax-efficient.

Landlords want as much free monthly cash-flow as possible an interest only mortgage will assist in this objective.

Better cash-flow

Monthly payments on an interest-only mortgage will be far less than on a repayment deal.

Where there is still a long mortgage term outstanding, interest-only payments can be as much as 47% lower each month than standard repayment plans.

This means more free cash each month, which will enable the landlord typically to buy other properties and grow their portfolio.

Reduction in tax to pay

The second reason is tax efficiency. Mortgage interest payments can be totally offset against rental income (as well as other eligible expenses) when calculating your tax bill. So having a large interest-only mortgage can be very tax efficient indeed.

Let’s say you have rental income each month of £1,000. Your interest-only mortgage repayments are £450 the maximum you could be taxed on each month (before other expenses) is £550.

Repayment mortgage and taxation

If you chose a repayment mortgage, you would be reducing the part of the monthly payment made up of interest. More of your rental income would therefore become taxable thus your tax bill would rise. Towards the end of the repayment period almost all of the monthly payment would be repaying capital and the landlord would have no interest to offset against tax.