Interest Only Buy-To-Lets | Accountant Advice

Hello and welcome back to our channel and podcast! My name’s Gemma, and here at WIS we talk about all things related to money, mortgages, and a positive money mindset.

On today’s episode of Let’s Talk Money and Mortgages, we’re joined once again by Ifthikar (“Ifthi”), a trained accountant and mortgage broker with over 10 years of industry experience. He’s also one of the founding directors here at WIS.

What is an interest-only mortgage?

Ifthi:

Most mortgages you see are repayment mortgages (capital plus interest). That’s very common in residential mortgages.

With a repayment mortgage, you pay down the loan itself plus the interest.

With an interest-only mortgage, you don’t pay off the capital. For example, if you borrow £100,000, at the end of the term you will still owe £100,000. You only pay the interest during the term.

Interest-only is very common in the buy-to-let space, whereas repayment is much more common in the residential space.

Why are interest-only mortgages so popular with buy-to-let investors?

Ifthi:

There are two main reasons:

Cash flow:

With interest-only, the monthly payments are lower.

Example: A repayment mortgage might cost £1,000/month (£500 capital + £500 interest). With interest-only, you’d only pay £500 interest.

If your rental income is £1,200, then:

• Repayment mortgage → £200 cash flow.
• Interest-only mortgage → £700 cash flow.

This gives investors more money in hand to reinvest, often into another property.

Lender affordability:

Banks often lend more for interest-only buy-to-lets.

Why? From the bank’s view, £500/month is less risky than £1,000/month, because there’s less chance of negative cash flow.

So with interest-only, you can usually borrow more.

What are the drawbacks of an interest-only mortgage?

Ifthi:

The two biggest drawbacks are:

Balance doesn’t reduce:

If you borrow £100,000, even after 25 years, you’ll still owe £100,000.

Fewer product choices over time:

With repayment, your loan-to-value (LTV) improves as your balance drops. This gives you access to cheaper mortgage products.

With interest-only, your LTV only improves if the property value rises, because your loan balance doesn’t fall.

What happens at the end of an interest-only buy-to-let mortgage term?

Ifthi:

At the end of the term, you still owe the full balance.

Example: After 25 years, you’ll need to repay the full £100,000.

The bank will expect repayment when the mortgage ends.

If you don’t have savings or another repayment plan, you may need to sell the property to clear the debt.

This can cause problems if you’re unprepared — especially if you have to sell quickly or at a loss.

That’s why planning ahead is essential.

How can you avoid issues at the end of the term?

Ifthi:

You must plan in advance. Some common strategies are:

• Pension pots: Build up pension savings alongside your mortgage, then use them to repay the balance.
• Longer terms: Many banks now extend buy-to-let terms to age 75 or even 80, giving you more breathing space.
• Company structure: If your long-term goal is to pass properties to the next generation, consider holding them in a company. That way, you can transfer shares rather than selling properties.

But this requires professional financial advice.

Can a buy-to-let be used as a retirement plan?

Ifthi:

Yes, many people see buy-to-let as their retirement plan instead of pensions. But again, you need to plan carefully:

• Avoid large tax bills: Don’t sell all properties at once, as this could create a massive tax bill.
• Phased sales: Many people sell properties gradually towards the end of their mortgage terms.
• Company ownership: Buying through a company allows you to:
• Enjoy rental income in retirement.
• Pass properties more smoothly to children.
• Mitigate inheritance tax issues (currently 40%).

A lot of people want to enjoy the rental income during retirement, then pass the portfolio on. But without planning, inheritance tax can become a huge issue.

Final Thoughts

Interest-only buy-to-let mortgages provide flexibility and cash flow benefits, but they also carry risks at the end of the term.

Planning is essential — whether through pensions, company structures, or phased sales.

Always seek professional financial and mortgage advice tailored to your circumstances.

And a reminder:

A mortgage is secured against your home or property. It may be repossessed if you do not keep up with mortgage repayments.