An interest-only buy-to-let mortgage keeps monthly payments lower because you pay only the interest, but the full loan is still owed at the end of the term. A repayment mortgage costs more each month and clears the debt by the end. The Bank of England reports that 82% of buy-to-let loans are interest-only.
How does an interest-only buy-to-let mortgage work?
An interest-only buy-to-let mortgage charges you only the interest each month, so the amount you borrowed stays the same until the term ends.
The lower payment leaves more rent each month to cover voids, repairs and tax. The catch is the lump sum at the end, which most landlords plan to clear by selling the property, remortgaging or using savings.
How does a repayment mortgage differ?
A repayment mortgage, also called capital and interest, includes part of the loan in every monthly payment, so the balance falls to zero by the end of the term.
Payments are higher from the first month, which leaves less rental surplus. In exchange, your equity grows each year without relying on house prices, and there is no lump sum to find later.
Interest-only vs repayment
| Interest-only | Repayment | |
|---|---|---|
| Monthly payment | Lower: interest only | Higher: interest plus capital |
| Balance at end of term | Full loan still owed | Zero |
| Loan-to-value over time | Falls only if prices rise | Falls every month |
| Tax relief | On the interest, at basic rate | On the interest part only |
| Main risk | Shortfall at the end | Thinner monthly surplus |
Which part of the payment is tax-deductible?
Only the interest element of a buy-to-let mortgage payment can be offset against rental income, and GOV.UK says the relief on finance costs is restricted to the basic rate of income tax.
The capital you repay on a repayment mortgage earns no tax relief, so it comes out of taxed income. That is one reason interest-only is common among landlords. Our guide to Section 24 and mortgage interest relief shows how the tax credit is worked out.
How does the choice affect your loan-to-value?
Loan-to-value on an interest-only buy-to-let loan falls more slowly than on a repayment loan, because the balance does not shrink, as the Bank of England notes.
With interest-only, any fall in LTV comes from rising property values. A lower LTV can unlock better rates when you switch deal, so a repayment loan can improve your options at each buy-to-let remortgage. The deposit you start with matters too: see our page on buy-to-let deposit and LTV.
What happens at the end of an interest-only term?
At the end of an interest-only term, the whole loan must be repaid, usually from a sale of the property, a remortgage, savings or a mix of these.
Planning an interest-only exit
- Set the repayment planSale, remortgage, savings or a mix.
- Check it during the termReview property value and the balance.
- Talk to the lender earlyThe FCA says early contact widens the options.
- Allow for tax on a saleCapital gains tax is due within 60 days of completion.
Selling to repay can trigger capital gains tax, which UK residents must report and pay within 60 days of completion, according to GOV.UK. The FCA encourages interest-only borrowers to speak to their lender as early as possible, as those who engaged early had a wider range of affordable options.
Which one suits which landlord?
Interest-only tends to suit a landlord who wants the highest monthly rental surplus and has a clear plan for the lump sum, while repayment suits one who wants the debt gone by a set date.
Both types are also tested against rent in the lender’s stress test. This page is general information, not personal financial advice: a whole-of-market broker can compare products for your situation.
FAQs
Are most buy-to-let mortgages interest-only?
Yes. The Bank of England reports that 82% of buy-to-let loans are on interest-only terms.
Can I deduct capital repayments from my rental income?
No. GOV.UK says only the interest element of the mortgage payment can be offset against rental income.
What if I cannot repay an interest-only loan at the end?
The FCA advises contacting your lender as early as possible, as borrowers who engaged early had a wider range of affordable options.
Interest-only maximises monthly cash flow but leaves the whole loan to repay; repayment costs more now and clears the debt. Choose interest-only only with a clear exit plan.
References
- The buy-to-let sector and financial stability — Bank of England Quarterly Bulletin (15 December 2023): 82% of BTL loans interest-only.
- Income Tax when you rent out a property: working out your rental income — GOV.UK: only the interest element is deductible, relief at the basic rate.
- TR18/1: The fair treatment of existing interest-only mortgage customers — FCA: speak to your lender as early as possible.
- Report and pay Capital Gains Tax if you sold a UK property — GOV.UK: 60 days from completion to report and pay.
