Do landlords have a clue about interest-only?

03/09/2013 By Mark Long

A great deal of noise exists around interest-only lending in the residential market, where this type of product, though important, remains relatively niche for well understood reasons.

It is a very different situation in the buy-to-let market, which is dominated by interest-only borrowing.

BVA BDRC’s Landlords Panel survey indicated that nine out of 10 landlords had at least one interest-only loan across their portfolio. Many still had a long period to go until term end, with respondents typically claiming to have an average of 13 years remaining on their loan term.

Given the massive contribution being made by interest-only to the private rental sector, how do landlords plan to settle their debts at the end of the repayment term? Sell, sell, sell seems to be the solution.

Almost three quarters of interest-only buy-to-let landlords reported in the survey that they plan to sell the property as a settlement solution, hopefully pocketing a nice capital gain into the bargain. Other repayment strategies included mortgage over-payment (usually smaller landlords) and the use of cash savings (mentioned by 21% each).

Further down the solutions list, around one in seven landlords mentioned switching to a repayment product downstream or releasing invested assets to meet their debt.

Just 3% of the 700+ buy-to-let customers interviewed reported that they ‘didn't know' how they were going to repay the capital on their borrowings.

On this basis, buy-to-let lenders can be reassured that, unlike their interest-only residential counterparts, the vast majority of landlords have given significant thought to meeting their obligations.