Steering your buy-to-let through the downturn

The buy-to-let market took off in the late 1990s, fuelled by the introduction of buy-to-let mortgages which were calculated on the anticipated rental income rather than the landlord's earnings. But the financial turmoil of the last 12 months has limited cheap credit for landlords and there is now a signifcant decline in the number of attractive mortgage deals on offer.

End of the good times?

According to the Royal Institution of Chartered Surveyors (RICS) buy-to-let loans are disappearing faster than mainstream mortgages. Experts agree that the outlook is grim for Britain's 400,000 buy-to-let investors and many predict it will get worse. A large number of buy-to-let investors are coming to the end of their attractive fixed-interest periods and facing the prospect of higher monthly repayments as lenders tighten their criteria and the rate at which they lend to each other (LIBOR) climbs upwards despite a falling base rate. The upshot is that many landlords are finding that rental income no longer covers their mortgage repayments.

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Nowhere to turn

Landlords would normally compensate for this increase by rasising rents. But novice landlords are finding it difficult to pass on their rising costs. Tenants are generally protected from rent rises by six or 12-month contracts, which puts on hold any increase. And landlords are reluctant to raise rents because of increased competition; a market that is quickly becoming saturated means empty properties are now a real possibility. "Established landlords with lots of equity and good rental income will continue to find loans," says Lee Grandin of specialist broker Landlord Mortgages. "But novice landlords with certain types of new-builds, low equity or poor rents will face difficulties. Lenders have been hit and are looking to protect themselves by refusing to lend or demanding larger deposits. People who have bought in the last couple of years could struggle."

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18 April 2008 © Moneyextra.com

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