When it comes to buying a property on a mortgage, there are two major deals you can apply for – an interest-only mortgage and a repayment mortgage.

A repayment mortgage is a mortgage where you need to repay a specific portion of the principal along with interest on the amount borrowed. By the end of a repayment mortgage term, all your debts are settled.

Here, we will talk about the other type of mortgage deal people apply for – an interest-only mortgage.

What is an interest-only mortgage?

As the name suggests, an interest-only mortgage requires you to repay only the interest charged on the amount borrowed in instalments. Here, your monthly repayments do not include a portion of the principal borrowed.

Interest-only mortgages allow you to pay off your interest as it is accrued, preventing your overall debt from rising. These mortgages come with a pre-defined term, after which you will need to pay the principal to settle your debts.

If you are planning to take an interest-only mortgage, remember that it does not reduce your total repayment. While your repayments only consist of the interest, you will need to repay the full principal at the end of the term.

Residential interest-only mortgage

A residential interest-only mortgage is given to borrowers to buy residential properties for themselves. While such mortgages are still available, securing them is more difficult than securing them a few years ago.

The lending criteria for residential interest-only mortgages are often stricter than other mortgages. Since the 2008 financial crisis, mortgage lenders have become hesitant to give such mortgage deals as they are deemed riskier. Lenders giving these mortgages often ask for a high deposit and minimum income threshold to secure their deals.

Ensure that you work with a skilled and experienced mortgage broker and go through their mortgage broker guide before applying for a residential interest-only mortgage.

However, it is easier to obtain buy-to-let interest-only mortgages.

Buy-to-let interest-only mortgage

These interest-only mortgages are given to borrowers willing to purchase properties to rent them. These properties are not purchased for the homebuyers’ personal residential. As compared to residential interest-only mortgages, lenders would provide buy-to-let interest-only mortgages more readily.

This is because these deals are less risky. As the borrowers often pay the monthly interest from their rental income, they are able to gather enough funds to pay off the principal at the end of their interest-only mortgage term.

Why should you choose a buy-to-let interest-only mortgage in 2022?

Here are a few reasons why you should choose a buy-to-let interest-only mortgage in 2022:

Low monthly repayments

The biggest benefit of getting an interest-only mortgage for your buy-to-let property is that it brings your monthly repayments down. Most landlords sell their buy-to-let properties by the end of the interest-only term and invest in new properties.

Higher rental profits

Reduced monthly repayments automatically increase your monthly rental profits. The money saved after making interest payments can be used to pay off the principal, pay a deposit for a new buy-to-let property, and for other fruitful purposes.

Tax benefits

Buy-to-let interest-only mortgages are often tax-efficient, provided your investments and finances are arranged effectively. Landlords can avail themselves of tax benefits despite changes made to the landlord tax legislation.

No minimum income

Most buy-to-let lenders do not have minimum income requirements while dealing with borrowers. This is often because the property itself will lead to the borrower’s income. Depending on the mortgage lender, a buy-to-let property’s rental income should be around 125% - 145% of the mortgage. This reduces the lender’s risk and allows the buyer to save more.