Novice landlords excluded as lenders get tough

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by Gill Montia

Falling property prices and rising tenant demand may be encouraging potential landlords to investigate the buy-to-let market but they will soon find that the outlook, in terms of getting a mortgage, is bleak.

While existing landlords are facing large increases in mortgage costs when remortaging, novice landlords are now effectively excluded from the sector.

Around sixteen buy-to-let lenders have withdrawn mortgages to landlords in the past few weeks.

According to financial website, Moneyfacts, there were 3,622 buy-to-let products available last summer and the number has now declined to around 620.

Specialist lenders such as Paragon have closed to new business and Abbey now only offers a fixed-rate mortgage at 6.99%.

Last week, HBOS, which owns Halifax, Intelligent Finance, Bank of Scotland and Birmingham Midshires increased rates and arrangement fees for buy-to-let borrowers.

As with mainstream residential mortgages, loan-to-value (LTV) ratios have increased throughout the credit crisis, so that many landlords now need to raise a deposit of 25%.

Some analysts expect lenders to begin to pull their 85% LTV products in the week ahead, as fears about negative equity increase.

Lenders are also asking for rental cover (the ratio of rent to mortgage) of up to 130%. Prior to the credit crisis 100% was common.

Despite landlords’ resistance to predictions of a buy-to-let crash, average rental yields continue to disappoint, leaving investors who are dependent on capital growth to make a profit in a difficult position, as the housing market slows.

According to the Association of Residential Letting agents, the average annual rental yield stood at 4.66% in the first quarter of 2008.