Storm clouds gather for buy-to-let

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by Gill Montia

The debate over the future of the buy-to-let sector continues with landlords apparently immune to predictions of a collapse.

Approvals for buy-to-let mortgages rose 23% in 2007, despite high property prices, rises in mortgage costs and predictions of a property slump

Figures from the Council of Mortgage Lenders show that last year, the number of outstanding buy-to-let loans rose to 1,038,000 with a total value of £122 billion, up from 846,900, worth £95 billion, in 2006.

According to financial website, Thisismoney.co.uk, the problems facing the buy-to-let market are a gathering storm, and emanate from the UK’s decade-long period of house price inflation.

In 1997, the average property cost £70,000 according to the Halifax House Price Index, compared to £197,000 at the end of 2007.

Over ten years, many landlords have been attracted by the high capital gains delivered by house price inflation and moved away from the concept of rental income paying the mortgage and delivering healthy returns on top.

According to buy-to-let lender Paragon, the average rental yield stood at 9.84% in January 2002. However, by January 2008, this had fallen to an average yield of 6.2%.

In addition, the cost of entering the buy-to-let sector has risen sharply, with a 15% deposit for an average property more than doubling from £13,000, in 2002, to £28,000 in 2007.

Meanwhile, the credit squeeze has seen a reduction in mortgage products with high loan-to-value (LTV) ratios.

Alan Harper of Moneyfacts.co.uk, says: “In May 2007, when property prices were rising and the market was booming, 13 buy-to-let lenders were prepared to offer 90% LTV - the highest ever offered on a buy-to-let mortgage. Now this number has dropped to five. This suggests lenders are more actively competing for less-risky business and allowing landlords with larger portfolios, who can afford to put down more substantial deposits, to take advantage of the most competitive rates.”