The future of buy-to-let

If you were a member of the 'sceptic camp' 10 years ago and bet that buy-to-let would fall apart at the seams, you may be thinking it's time to collect your winnings. Last week, property investment outfit, Inside Track that hosted free seminars selling expensive courses up and down the country on how to become a property millionaire complete with flesh and blood case studies went into administration. Its managing director, Tony McKay blamed, "continued and sustained difficulties arising from the credit crunch". But whichever way you look at Inside Track's dubious property tactics they clearly couldn't stand up in an anything below red hot market.

Too much of a good thing

The oversupply of new-build buy-to-let homes which resulted from ill thought out council planning combined with too-eager first-time landlords, is also starting to crack the market. Rents in the most affected cities of Liverpool and Nottingham have fallen by 2%, according to data provider, Hometrack. And this is against a backdrop of rents rates going up. According to the latest research from buy-to-let lender, Paragon, the average UK rent has now reached a record £1,000 a month or £12,041 annually. Managing director at Paragon, John Heron, said: "The buy-to-let backdrop for remains positive across the country potential residential purchasers are reluctant to buy in the current market or are unable to secure a mortgage and this is fuelling extra demand for rented accommodation."

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Not good at the edge

But to benefit from the improving side of buy-to-let, landlords must be in a comfortable position with the downsides and there are many. For a start, property prices fell by a further 1.3% in April, according to Halifax, after seeing dips of 2.5% in March, which puts pay to those landlords looking for a quick equity buck. And if short-term or even medium-term house price falls are not a concern for landlords in it for the long haul, the lack of mortgage availability still might be.

According to Moneyfacts, the number of separate buy-to-let mortgage deals fell from 884 at the start of April to under 600 today. Buy-to-let lenders now also typically require a 25% deposit, opposed to 10 per cent, while interest rates are pegged at new premiums of between six and seven per cent. And even with these higher rates, rent to interest cover which is the proportion of mortgage interest borrowers must receive in rent to qualify for a deal are now between 115% and 120% rather than the more lax days of 100%.

Want to be a landlord? Find the best discount rate buy to let mortgages.

15 May 2008 © Moneyextra.com

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