Ground rules for prospective landlords

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by Gill Montia

Mixed forecasts for the buy-to-let sector have left many would be landlords uncertain of whether to enter the market.

House price inflation and higher interest rates have made buy-to-let a much tougher proposition than in the early 2000s and prospective landlords should only purchase a property if they are satisfied that the monthly rental income will cover mortgage debt and provide an additional worthwhile return.

In recent years, property prices have soared and many people investing in buy-to-let have benefited from capital growth.

This growth overcame the difficulty of rental income failing to meet the recommended 125% of the mortgage repayment level.

The level has been difficult to achieve in some areas of the UK and has resulted in landlords making up rent shortfalls.

Average UK house prices are expected to stagnate during 2008 and 2009 making buy-to-let a good investment only if an acceptable return is derived from rent.

With banks and building societies currently paying interest at over 5% on savings accounts, buy-to-let is struggling to compete as an investment alternative.

For the undeterred, care should be taken when choosing a mortgage because future falls in house prices could reduce loan-to-value ratios and make remortgaging difficult.

One leading buy-to-let lender, Paragon, has recently closed to new business and most providers are now applying hefty fees.