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I am thinking of investing in buy to let property, but am a bit unsure about the mortgage process. Please can you explain?

I am thinking of investing in a buy to let property but I am a bit unsure about the mortgage process. If I take out a buy to let mortgage on an interest-only basis for say 20 years, what happens at the end of the term? If I don’t have the money to pay back the original loan, will I be able to take out another mortgage or will I have to sell the property to repay the lender? Or should I take out a capital and repayment mortgage, which means my monthly repayments will be more expensive than an interest-only mortgage and therefore I would have to buy a cheaper property in order to afford it?

Only you can decide on which option to take, so it’s important that you do lots of research and examine your reasons for wanting to invest. Take a look at our top 10 tips for buy to let.

If you go for interest only it is crucial to have an exit strategy at the end of the term such as selling to release funds to repay the loan or refinancing. Using interest only the investor's aim is usually to build a portfolio of property to provide them with a regular income and a lump sum (through capital appreciation) when they sell up. Monthly mortgage payments are lower, so the investor has more cash flow to use for business operating costs. He/she can also use the equity in existing properties to raise finance to make further property purchases. This is known as gearing or leverage.

With interest only, there are also certain tax advantages as interest due on buy to let mortgages can be off-set. In this regard, it is important to seek professional advice either from HMRC or a qualified accountant regarding the tax incentives available.

With a repayment mortgage (also known as a capital and interest mortgage), the borrower pays off some of the original loan amount and the interest due. Some borrowers take this option because they want to own the property outright at the end of the mortgage term. This route is particularly popular with those who use buy to let as an alternative pension strategy and have no plans to become professional landlords.


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