Buy to let landlords being squeezed

A glut of buy-to-let properties could come onto the housing market as borrowing for these types of loans becomes harder to get and landlords struggle to meet payments, according to new data from savings and investment provider, Skandia.

“Pressure on indebted landlords is intensifying as the reduction in the supply and affordabily of mortgage finance gathers steam,” said Nick Poyntz-Wright, chief executive of the Skandia UK, talking exclusively to the Financial Times.

He said that with repayments they cannot afford, a fight to find tenants and a problem remortgaging, prospects are bleak for buy-to-let landlords. And the collapse of Bradford & Bingley, the country’s biggest buy-to-let lender, has added to the problems.

Data released by the Council of Mortgage Lenders found that 1.58 per cent of buy-to-let loans – 18,000 cases – were in arrears at the end of September, up from 1.1 per cent or 12,100 cases at the end of June. The proportion of landlord mortgages in arrears was higher than the 1.44 per cent of all mortgages behind with payments, at 168,000 in total.

The CML data also showed that third quarter lending advances for buy to let mortgages were down 45.5 per cent from the second quarter. Even if fourth quarter gross lending matches this quarter’s £4.8bn total buy-to-let mortgages of £9.6bn for the second half of 2008 would be the weakest since the first half of 2003 which saw £7.6bn of lending.

Research from Skandia forecasts that £18bn of cash will be pulled out of the market in the next few years as the mortgage-backed buy-to-let market retreats to its average size over the past decade. This is because although house prices are falling nationwide, homes most affected in the recent slide have been new-build flats and apartments designed to be sold as investments for buy to let investors.

With mortgage costs for these types of loans up sharply, as the biggest players in the buy-to-let market curb lending, landlords are also finding it difficult to satisfy their monthly costs from rents.

In recent years buy-to-let property investment has grown strongly on hopes of sustained high financial returns compared with other asset classes, with much of this growth coming from mortgage-financed investment. The reversal of this trend looks set to accelerate.

Compounded by falling residential property prices and lower rates of rental growth, rising mortgage servicing costs will drive more aspiring landlords from buy-to-let property, releasing increasing sums of private investment capital that has gone in to property speculation in recent years.

Poyntz-Wright, said: “The dramatic fall in UK buy-to-let borrowing, driven by increasing lender risk aversion and more onerous lending criteria, and compounded by falling property prices and sluggish rental growth, means that investors are increasingly likely to question the suitability of residential property as an asset class.

“In these unprecedented times when investors are increasingly conscious of the need for strategies that preserve their wealth, it is vitally important to seek high quality advice to create a diversified investment portfolio and optimise asset allocation in a tax-efficient way.”