Buy to Let Mortgage Repayment vs Interest Only
Repayment versus interest only for buy to let is the same trade-off as for any mortgage, sharpened by rental income. Repayment builds equity every month and ends with no debt, but takes more of the rent. Interest only leaves the rent mostly as cash flow, but leaves the full debt outstanding.
On a £180,000 loan at 5.5% over 25 years, repayment is about £1,105 a month with about £151,600 of total interest, while interest only is about £825 a month with about £247,500 of total interest and £180,000 still owed. The repayment route costs about £280 more a month but saves roughly £96,000 in interest and removes the need to refinance or sell to clear the debt.
Tax also plays a part. Mortgage interest relief for individual landlords is limited to a tax credit, so the interest-only advantage is smaller than it once was. Higher-rate taxpayers should compare the after-tax cash flow of both options, not just the headline payments.
- Repayment: equity grows, debt cleared, higher monthly payment.
- Interest only: cash flow higher, debt remains, more total interest.
- Compare after-tax cash flow, not just headline payments.
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