Buy-to-let Becoming Tougher

A report by the Royal Institution of Chartered Surveyors (RICS) says that buy-to-let property investment has become a ‘rich man’s game’, with investment in residential property now beyond the reach of the average person, thanks to high property prices and expensive mortgages.

RICS said that a prospective buy-to-let investor would need a deposit of 30% to meet traditional lending standards, and buy-to-let lenders like monthly rent to cover mortgage payments to at least 125%. Buy-to-let buyers now need a deposit of around £65,000 compared to only about £10,000 five years ago.

RICS senior economist David Stubbs, says: “It takes more capital than ever to set up a buy-to-let investment. Would-be investors who have missed out on the impressive returns of previous years are now finding the hurdles to property investment are higher than they imagined. However, existing landlords should be able to use the equity in their past investment properties to fund the deposit needed for new ones, and this should ensure that demand from the buy-to-let sector does not dry up entirely.”

The term buy-to-let was coined only about ten years ago, but has quickly risen in popularity in that period, with house prices going up by around 285%, according to figures from Halifax.

The increase in buy-to-let has been amazing. In the first half of 2000 there were 120,300 mortgages worth £91.bn for buy-to-let; in the first six months of 2007 there were 938,500 buy-to-let mortgages worth £107.8bn.

Any landlord already of board with buy-to-let is in a good position, but for those wanting to join the market, and those who have joined recently, it is a tough time. Lenders have actually relaxed criteria, allowing borrowing on the basis of personal income rather than rental income, and with less cash up front.

The National Landlords Association says that newcomers should do their homework, and stick to traditional entry criteria for their own benefit.

In some areas there is still strong demand for property, but in other places there has been an over-supply of flats, and buy-to-let landlords should avoid these places