Guide · 4 min read
Interest-only or repayment mortgage for buy-to-let?
Interest-only keeps the monthly cost low but leaves the whole loan to repay at the end. Repayment clears it, but costs more each month and the tax doesn't help.
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Key points
- On interest-only you pay just the interest: £563 a month on our £135,000 loan. You still owe all of it at the end.
- On repayment you pay £789 a month, and the loan is gone after 25 years.
- Only the interest counts for tax. The loan you pay off comes out of profit that's already been taxed, so repayment can leave a landlord short each month even when the deal makes money.
- Most Buy-to-let mortgageA mortgage for a home you'll let. The lender decides how much to lend mainly on the rent, using the interest cover test, rather than on your salary, and usually wants a deposit of at least 25%. are interest-only. Landlords plan to clear the loan by selling, or keep it and RemortgageReplacing your mortgage with a new one on the same property, from a new lender or your current one (a product transfer). People do it for a better rate or to release equity..
What each costs a month
Our example is a £180,000 house let for £1,100 a month, with a 75% loan of £135,000 at 5% over 25 years, and the usual costs of a letting agent, repairs, insurance and two Empty weeks (voids)Weeks a year with no tenant and no rent, while the costs carry on. a year.
| Figure | Interest-only | Repayment |
|---|---|---|
| Mortgage payment a month | £563 | £789 |
| Interest in the first year | £6,750 | £6,687 |
| Loan paid off in the first year | £0 | £2,784 |
| Cash left a month, after every cost | £310 | £83 |
Repayment costs £227 a month more. That money isn't lost: it pays the loan down, so it's a kind of saving. But it's cash you can't spend, and it leaves the deal with £83 a month instead of £310, a much thinner cushion for a repair or an empty month.
What you still owe
| After | Interest-only | Repayment |
|---|---|---|
| 5 years | £135,000 | £119,583 |
| 10 years | £135,000 | £99,798 |
| 15 years | £135,000 | £74,407 |
| 20 years | £135,000 | £41,820 |
| 25 years | £135,000 | £0 |
| Interest over 25 years | £168,750 | £101,759 |
Interest-only costs more interest in total, because the loan never gets smaller. And at the end you still owe the whole £135,000, usually paid by selling the house or by remortgaging. That works well if prices have risen. If they've fallen, a sale may not clear the loan, and a new lender may not lend as much.
Repayment works the other way: each payment holds a little less interest and a little more of the loan, so you own more of the house every year, whatever prices do.
How tax treats each
If you own the property in your own name, tax is worked out on the rent less running costs. Mortgage interest isn't taken off; instead you get a Tax credit for mortgage interestThe 20% of your mortgage interest and fees that comes off your income tax bill under Section 24. It's worked out on the interest, the profit or the income above your personal allowance, whichever is smallest, and any left over carries forward. of 20% of it (Section 24). The loan you pay off isn't a cost for tax at all. So the tax bill is about the same either way, but repayment takes more cash out first.
| Figure | Interest-only | Repayment |
|---|---|---|
| Cash left after the mortgage payments and costs | £3,722 | £1,002 |
| Income tax on the rent | £744 | £757 |
| Cash left after tax | £2,978 | £245 |
| Loan paid off | £0 | £2,784 |
| Figure | Interest-only | Repayment |
|---|---|---|
| Cash left after the mortgage payments and costs | £3,722 | £1,002 |
| Income tax on the rent | £2,839 | £2,852 |
| Cash left after tax | £883 | −£1,850 |
| Loan paid off | £0 | £2,784 |
The higher-rate landlord on repayment is £1,850 a year out of pocket after tax. They pay tax on profit they've spent paying off £2,784 of the loan, so the difference comes from their salary. The deal is building wealth, but it costs them cash every month to own it.
A Limited company buy-to-let (SPV)Owning through a company of your own, often a 'special purpose vehicle' set up only to hold property. The company pays corporation tax on the profit and deducts mortgage interest in full; you pay dividend tax on what you take out. It pays the higher rates of stamp duty or Land Transaction Tax. is taxed on profit after interest, but capital repayments still come out of taxed profit. See Limited company or your own name?
What lenders look at
Most lenders run their Interest cover (ICR) and the stress testThe rent divided by the mortgage interest. Lenders test it at a higher 'stress' rate (your rate plus about 2 points on a shorter fix, and not below about 5.5%) and usually want at least 1.25, or 1.45 from higher-rate taxpayers. on interest-only payments whichever type you choose, so repayment doesn't usually change how much you can borrow. On our example the rent covers the test interest 1.77 times either way; How much can I borrow for buy-to-let? explains the test.
For interest-only, lenders want a believable plan to repay at the end, which for a buy-to-let is usually selling the property. They'll also check your age at the end of the term.
Can you mix interest-only and repayment?
- Interest-only with overpayments. Many Fixed rateA mortgage rate that stays the same for a set time, often 2 or 5 years. When it ends the loan moves to the lender's standard variable rate unless you take a new deal. let you pay off up to 10% of the loan a year without a charge. You pay the loan down when you have spare cash, without being tied to it.
- Part and part. Some lenders will split the loan, with part on interest-only and part on repayment.
- Interest-only now, repayment later. Many landlords borrow interest-only while they build up their properties, then switch to repayment or pay down loans as they get closer to stopping.
- Save the difference. The £227 a month repayment would cost could go into savings or a pension instead. It only works if you actually do it.
To compare the two payments on any loan, use the mortgage calculator.
Common questions
What happens when an interest-only mortgage ends?
You must repay the whole loan, £135,000 on our example, on the end date. Most landlords sell, remortgage or use savings, and lenders write well before the end to ask for your plan. If you can't pay, some will extend the term, but they don't have to, and they can take the rent or sell the house.
Does a repayment mortgage help when you remortgage?
Yes. Each year you owe less, so your loan to value falls even if prices don't rise, which can earn a lower rate. On our example you'd owe £119,583 after 5 years on repayment, against £135,000 on interest-only. A smaller loan also needs less rent to pass the lender's test.
Should you pay off your home or buy-to-let mortgage first?
Usually the home, if the rates are similar and you own the rental in your own name. Your home's mortgage interest gets no tax relief, while buy-to-let interest earns a 20% tax credit, so each pound off the home loan saves more. Compare the rates after that credit, and check for early repayment charges first.
Is repayment better in a limited company?
It hurts less. A company takes off all its interest, and the profit that pays the loan down has only had corporation tax taken from it, which is usually less than a higher-rate taxpayer's income tax. Paying down the company's loan also needs no dividend, so there's no second tax. The monthly payment is just as high.
Figures from our calculator, on the rules in force today, checked against GOV.UK and the Welsh Revenue Authority on 8 October 2026. Not financial or tax advice: check your own case with an accountant.