Can buy-to-let survive?
The number of mortgages available on the market has fallen substantially and lenders are now demanding greater deposits. So is buy-to-let dead?
As house price drops create some bargains - although prices may well fall further - are small buy-to-let landlords able to get involved? Or will those who have been burnt now want to turn their backs on property for good.
Daniel Barnes looks at what went wrong with buy-to-let and the future - as the number of buy-to-let repossessions rose 88 per cent and the number buy-to-let mortgages in arrears rose by 70 per cent in the last year.
Buy-to-let problems
Last week it was revealed arrears and repossessions for buy-to-let properties were up.
Landlords are facing numerous pressures. Falling house prices eating away at yields and rents dropping as homeowners put properties on the rental market as they cannot find a buyer are among the factors making a buy-to-let investment look far less appealing.
Vincenzo Rampulla from the National Landlords Association (NLA) explains: "There are obviously problems with arrears becoming more prevalent."
He added problems will increase if job losses rise and tenants are not able to pay their rent.
The mortgage market for buy-to-let has almost disappeared.
"Lenders are still risk averse. There is little appetite to lend as they are not sure if we are at the bottom yet. But we are seeing some encouraging signs," he says.
He explains larger landlords are now in a position to take advantage of falling house prices.
Buy-to-let mortgage desert
The current market for buy-to-let mortgages is basically desolate.
There has been a 95 per cent reduction in buy-to-let products available since 2007.
Of the top ten buy-to-let lenders from 2007, only two continue to offer new buy-to-let products. In the first three months of 2009, just 22,400 new buy-to-let mortgages were advanced.
During the property boom, it seemed lenders queued up to help people build small property empires so they could declare themselves property millionaires at dinner parties - even though they were really holding debts on seven figures.
In the first three months of 2009, just 22,400 new buy-to-let mortgages were advanced.
What went wrong?
Professor of economic geography Andrew Leyshon at Nottingham University explains the market grew as first smaller lenders looking to grow - such as the ill-fated Bradford & Bingley - and larger lenders followed suit.
At one point in the early 2000s, one in four mortgages in London were buy-to-let.
House price rises produced healthy returns and tenant demand was strong as the same house prices made property ownership unobtainable for many, immigration from the newly expanded EU saw hundreds of thousands of young people come to the UK, and university attendance grew.
And as confidence in the stock market and pensions dropped, many people looked to property.
At the time it seemed all you had to do was buy a property and wait for tenants to fall in, cover the mortgage payments and a couple of years later sell it with a nice profit.
"People were buying buy-to-let products off the shelf. I spoke to one person who only bought a buy-to-let property because after a dinner party he was the only person there who didn't have a property," says Professor Leyshon.
"Property clubs and seminars made it all too easy - to the point it was like buying on Amazon - even with options on how to fit out the property."
Arrears levels and repossessions for buy-to-let mortgages are now rising - and the number of mortgages is the market have fallen off a cliff.
Figures from moneysupermarket.com shows two years ago there were 4,384 buy-to-let mortgages on the market. Now there are just 213.
A minimum 25 per cent deposit is needed - but much larger deposits are generally demanded.
This means only cash rich and professionals with large portfolios are operating in the market - and taking advantage of falling house prices.
Keshav Thukaram, managing director of Smartlandlord.co.uk, explained the number of buy-to-let mortgages has dropped to just 200 "meaningful" deals - but lenders are starting to be more open - although they are now judging customers not just on rental yields - but also the landlord's personal finances.
"Lenders are much more open than six months ago and are now talking about new products. But it will be three to six months before they start launching new deals," he said.
David Whitaker, managing director of Mortgages for Business, concurs - explaining the buy-to-let mortgage market and buy-to-let in general is starting to lift its head from out of the trench - but the battle is far from done, never mind the war.
While lenders are starting to get an appetite for risk - even in the last few weeks - Mr Whitaker suggests the market is far from competitive.
"We are past the bottom point," he said.
"Leading the market are Mortgage Works and BM Solutions, but unless the second line of lenders come through competition is limited."
However, he did see fees starting to ease.
Buy-to-let problems
"What should buy-to-let landlords do now? I don't know. They have the choice to take a hit or make the best," Professor Leyshon said.
"There are many sad stories, some people were foolish, some were greedy.
"In the long term the situation looks hairy for some."
Currently, Mr Whitaker explains some landlords are benefiting from low interest rates and some are not.
"I was speaking to one landlord on a tracker with rental income of £700 a month and mortgage repayments of £70 - so happy days. But those who took out a fixed rate in 2007 - when it seemed interest rates were going to rise - are stuck on deals up there at 6.99 per cent."
For those planning to remortgage, the options are now becoming limited as both the equity they hold has dropped and the size of loans they can get. And some lenders' standard variable rates are not so generous.
The problem worsens as many buy-to-let mortgages are interest-only.
Professor Leyshon explains: "A lot of these buy-to-let mortgages are interest-only mortgages, so they're not actually repaying the principal, and many of them are on rates that need to be rolled over, and it's not so much that they can't afford these rates if they have to be rolled over, but do they have sufficient capital?"
Mr Whitaker, claims, however, long-term low interests can aid those struggling.
"There is light at the end of the tunnel. We debate a lot in the office about the future of interest rates," he says - explaining Mervyn King's statements at the launch of last week's Inflation report suggest predictions of the base rate staying at 0.5 per cent into 2010 may not come true.
The trap for borrowers is intensified as many flats now seem to have been overvalued in an overheated market - as lenders in effect provided 100 per cent mortgages - so now prices of some properties in particular city centre developments have fallen severely.
"When these mortgages have to be rolled over, it's a very different proposition, because some lenders have reduced their LTVs to 50 per cent so can these people find the capital to fund these mortgages?" states Professor Leyshon.
"Interest rates are no longer the issue, but capital is."
Lenders now, Mr Thukaram sees, have shifted their approach.
"At the moment, they are looking at credit history and financial position as equally important as rental yield," he says.
"Self-cert mortgages are more difficult to find because lenders want landlords to be financially sound."
He added lenders were making the right noises about increasing lending but no products were coming just yet.
Future of buy-to-let
The quality of new buy-to-let customers is changing, claims Mr Whitaker.
He explains a few months ago customers were talking about entering the market but without a clear time frame, but now investors are seeking mortgages with solid plans.
However, much still depends on lenders.
"Banks do need to start to lend at terms that are sensible," he said.
But he explains the buy-to-let model is changing for now.
"It is not about prices recovering and capital gains, but sustainable rental incomes and long-term yield.
"The get rich quick investors will not be returning quickly," Mr Whittaker predicts.
"But those with five to ten properties and a day job who have sensible plans and local knowledge will re-enter. Gifted amateurs are edging back."
Professor Leyshon now points to buy-to-let investors looking towards away from the new city-centre apartments to the ordinary suburbs where occupancy is more or less guaranteed.
"Lenders will be looking for mundane, regular sources of income rather than 'fictitious' potential income from as yet unrealised tenants," he says.
"This will put occupied terraced housing on the preferred list over the new-builds and conversions. where the return on investment is not as sure."
He went on to predict the future of buy-to-let will be away from speculative investments to local landlords knowing their patch.
"Research strongly indicates that you need local knowledge and active management to make a success out of the market," the academic claims.
"The days of speculative investment in property you haven't seen are rapidly coming to an end."
The message for future buy-to-let landlord is to do their homework and know an area well.
"At the moment, the short term gains are in student properties and holiday homes where there is still demand," explains Mr Thukaram.
"In the longer term do your research. There is no single pocket for growth, every street is different."
He added finding the right property in the right area could be more important than picking up cheaper stock from repossessions or auctions.
"In the new buy-to-let market there are much more challenges."
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