Problems in buy-to-let market

Being a buy-to-let investor is becoming a tougher proposition in the current financial climate. Buy-to-let investing has become very popular in the last few years. As savings rates fell and pensions reduced in value people began to look for a better way to invest their money. As property prices seemed to be going up relentlessly and as mortgage rates were low, investing in property as a buy-to-let landlord seemed a great way to boots a financial portfolio.

Experts now warn that there are no more easy pickings. It is not a ‘get rich quick’ scheme. In 2006 330,000 buy-to-let mortgages were taken out, worth a total of £38.4bn, according to the Council of Mortgage Lenders. Now mortgage rates are higher, the price of property is higher, and there is no guarantee that the property you buy will increase substantially in value or that you will be able to command the rental income you need to cover your mortgage interest payments and other costs. The market is tougher, and those looking to get into the market should be wary of easy buy-to-let deals, and still mark off against a strict checklist, or dreams of property riches may turn into financial disaster.

Worse news has also arrived, of possibly fraudulent buy-to-let borrowing. According to surveyors and lenders underhand borrowing exists on an unknown scale on the books of mortgage banks. Problems are coming to light because lenders are checking through their risks following the US sub-prime crisis, the credit crunch and the funding problems that have caused the crisis at Northern Rock. The problem areas appear to be with buy-to-let deals on new-build flats in cities where tenant demand has fallen and values are going down. The main concerns are where property prices have been inflated by the developer, and loans are taken out against those values. Actual prices paid were lower. In Thamesmead, south-east London, this sort of fraud is already being investigated by police.

“This could,” said Nationwide director Matthew Wyles, “be the tip of the iceberg. Lenders told valuers to seek out all hidden deals between buyers and developers, but were whistling in the wind. Off-contract transactions took place where not even solicitors knew of arrangements.”