Large numbers of buy-to-let investors are having their properties repossessed and sold off at auction as rising interest rates and over-development of new flats in some areas has meant that growing numbers of property investors are unable to meet interest repayments.

Last week the Department for Constitutional Affairs released figures for mortgage repossession actions entered in the third quarter 2006 of 34,626, a rise of 15 per cent on the same period last year. Mortgage lenders are cagey about what is driving these repossessions and bodies such as the Council of Mortgage Lenders do not differentiate owner-occupier repossessions from buy-to-let repossessions.

But auctioneers report that buy-to-let investors who have had their fingers burnt are accounting for a large slice of repossessions even though buy-to-lets still only account for a tiny fraction of the total mortgage market at just over 8 per cent.

“Currently over half of repossessions are buy-to-let. It has grown significantly,” says Gary Murphy, auctioneer at Allsop, the leading auction house for commercial and residential property.”

“We’ve had at least 2,000 lots this year. It would not surprise me if we had sold 600 repossessions. The more significant proportion of the last 12 months has been from the buy-to-let sector, although in the last two or three months there has been growth in domestic repossessions.”

Auctioneers estimate that the number of buy-to-let repossessions reaching auction will only be scratching the surface as they estimate that the vast majority of repossessions tend to be sold locally by estate agents.

“We are doing more and more sales further afield and most of them are repossessions,” adds Ben Doman, a surveyor at auctioneers Andrews & Robertson. “There are all types but large numbers fall into two categories. One is buy-to-let failures where people have entered the market overenthusiastically. There is a wide spectrum of those both old and new. Another area of the market is at the budget end of the owner-occupier market such as council house right- to-buy cases where people have run into trouble.”

Mortgage brokers report cases of buy-to-let repossessions particularly in new developments where investors may have paid over-inflated prices or underestimated the supply of rental properties from other buy-to-let investors. In some cases inexperienced investors simply failed to take into account costs such as buildings insurance, maintenance and management fees or void periods when the prop- erty stands empty between tenants.

“These buy-to-let people who bought some swish and swanky pad overlooking the river are having to subsidise it out of their own money,” says Chris Coleman-Smith, auctioneer and director at Savills.

“If they’ve got two or three of those, they might be finding it a bit hard.”

“I had a call from a guy in Cardiff who [was looking to sell] five or so flats. He was seduced by one of these developments and he got a discount because he bought four or five. But the rent still didn’t cover the mortgage.”

A number of mortgage lenders have now tightened their lending criteria on new- builds amid concerns that valuations have been too flattering because they failed to take into account separate incentives offered by developers. There have also been concerns that an oversupply of rental units in some developments has been depressing yields.

Last year Portman Building Society became the first lender to refuse to offer buy-to-let mortgages on new- builds. Since then, Ray Boulger, senior technical manager at mortgage broker John Charcol, says several lenders have increased the deposits required on buy-to-let mortgages for new-builds to 25 per cent of the property’s value, compared with standard minimums of 15 per cent.

There are now concerns that this week’s rate rise, which could be followed by another hike next year, will put further pressure on buy-to-let investors. Figures from Savills Research show that gross rental yields – which do not take into account repairs, management costs or void periods – were 4.7 per cent in prime Central London last year, compared with 5.3 per cent in the South East and 5.5 per cent in Scotland.

Mortgage brokers advise buy-to-let investors to subtract at least one percentage point from a property’s gross yield to reach a more realistic net yield figure.