Landlords struggle to find loans

Property investors looking to take advantage of lower house prices may be shut out of the market as new buy-to-let mortgage rates remain prohibitively high.

Lenders have withdrawn many offers and are hesitant to take on new business as they view the sector as high risk. Rents are starting to fall and, as the economy weakens, banks are concerned that landlords could default on their loans.

In addition, many landlords rely on capital growth so they take interest-only mortgages, which are an added risk in a falling property market.

Buy-to-let mortgage rates have barely dropped in recent months. Woolwich, for example, is offering three- and five-year fixed rates of 6.39 per cent.

Cheaper two-year fixed rates of 4.5-5 per cent are available from The Mortgage Works and BM Solutions, but these have fees of up to 3.5 per cent of the loan.

Also, at the end of the fixed period, these deals can switch to a high margin over base rate – 3 per cent, for example – which could feel expensive in two years’ time.

Some lenders have withdrawn from the market completely. Mortgage Express – the lending arm of the now government-owned Bradford & Bingley mortgages – is offering to waive early repayment charges to encourage existing customers to take their loans elsewhere.

David Hollingworth at London & Country Mortgages says that while this opens up options for landlords, the changes in the market mean they may struggle to find a comparable new deal.

As well as charging higher rates, many buy-to-let lenders have lowered their maximum loan-to-values and introduced tougher rental criteria.

Existing buy-to-let borrowers may be better off sticking with their existing lender once their initial deal has expired.

Some may find they revert to just one or two percentage points over the current base rate.