How Does an Interest Only Buy to Let Mortgage Work
An interest only buy to let mortgage works like this: you borrow against a rental property, pay only the interest each month, and repay the loan itself when you sell the property or remortgage. The monthly payment is the loan multiplied by the annual rate, divided by 12, so a £165,000 loan at 5.25% costs about £722 a month.
Lenders judge the deal on the interest cover ratio: the rent divided by the interest payment. They usually stress test that ratio at a rate higher than the product rate, and require it to clear a minimum, often around 1.25x to 1.45x. A property whose rent only just covers the payment at today's rate may fail the stress test.
The trade-off is the end of the term. Because nothing is repaid, you need a repayment plan: a sale, a remortgage, or other funds. If property values fall or lending tightens, refinancing can be harder than expected, so many landlords keep a cash buffer and review the plan well before the term ends.
- Pay interest monthly; repay the loan on sale or remortgage.
- Lenders check the interest cover ratio, usually stress tested.
- You need a repayment plan, because the balance never falls.
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