Has The Buy-To-Let Bubble Burst?

The credit crunch means buy-to-let mortgages are becoming more expensive and harder to qualify for. But does this mean the buy-to-let bubble has burst?

A few years ago, buy-to-let investing seemed like a super safe bet. Thanks to soaring property prices and cheap mortgage rates, the old adage `safe as houses' took on new meaning.

Fast forward to 2008, and the buy-to-let cash cow isn't looking quite so fat.

House prices are falling, mortgage rates are increasing and the buy-to-let industry is feeling the heat. This week, Inside Track - one of the companies that spearheaded the buy-to-let boom - went into administration.

For years, the company promised a bright future for buy-to-let investors, offering seminars and workshops on how to become a successful property investor. Now it faces bankruptcy.  

What Went Wrong?

The roots of Inside Track's troubles, like those of its customers, lie in the credit crunch.

As banks have lost liquidity and tightened up their lending criteria, things have begun to get tougher - particularly for buy-to-let borrowers.

Most buy-to-let mortgages are supplied by niche 'specialist lenders', which also offer sub-prime and self-certification mortgages.

This means buy-to-let lenders - and buy-to-let mortgage rates - have been badly hit by the US sub-prime meltdown and resulting loss of appetite for securitised debt.

As these lenders are currently battening down the hatches and trying to minimise `risky' lending, what does this mean for buy-to-let investors?

Where Next For Buy-To-Let?

With house prices falling, property investors hoping to make a quick buck look set for disappointment.

But even cautious buy-to-let landlords who are prepared to invest long-term may have difficulty entering the market or remortgaging existing investments.

Like home loans for owner-occupiers, buy-to-let mortgages are increasingly few and far between. According to Moneyfacts, the number of available buy-to-let mortgages stood at 3,362 last August but had plummeted to just 926 by the start of April.

So if you want a buy-to-let mortgage today, you would have 73% fewer deals to choose from.

As the market has shrunk, competition has fallen away, making the deals that are available more expensive and harder to qualify for.

Eligibility

In today's uncertain property market, buy-to-let lenders will want stronger assurances that you can afford to keep up your mortgage payments. They will judge this by looking at your rental income in relation to your mortgage payments.

In the past, many lenders would have considered you even if you only had 110% or even 100% rental cover, but today, most lenders will want 125%.

So if your mortgage payments were £1,000 a month, you would need to prove you could rent out the property for £1,250 before the lender would even consider offering you a mortgage.  

Even then, you may be refused if you do not have enough equity in the property. With house prices falling, lenders are now demanding bigger deposits from borrowers before they will agree to finance buy-to-let investments.

This could cause problems for investors who have built up their property portfolio through `gearing up' - releasing equity from properties that have gone up in value, then using it to buy more property.

Investors who have used this strategy are likely to own a handful of properties on which they owe considerable amounts, and so are at risk of falling into negative equity on several properties if house prices plummet.

That's why you will struggle now to find a lender offering to lend you 90% of the value of the property, and most of the deals with cheap rates will require more than a 15% deposit.

Costs

Rates on buy-to-let mortgages have increased dramatically since the credit crunch began, but there are still some decent deals available. In the table below, brokers at The Motley Fool Mortgage Service have rounded up the best they could find:

Source: The Motley Fool Mortgage Service 

If you're going to need a new mortgage on a buy-to-let property this year, it might be worth trying to secure a good deal now. Many mortgage providers will let you sign up for a product up to six months in advance.

Remember, in today's credit crunch climate, you have to act fast to secure the best deal, as lenders are withdrawing the market-leaders within weeks or even days.

It's also well worth using a whole-of-market broker to ensure you get the right kind of deal to suit your needs.

The End Of An Era?

Overall, it does seem that the buy-to-let boom might be over - at least for now.

Statistics from the Council of Mortgage Lenders confirm that buy-to-let investors are starting to struggle. The number who were behind on their mortgage payments by three months or more increased by 25% in the fourth quarter of last year, and repossessions rose by 26%.

On the other hand, it is worth remembering that buy-to-let properties should be viewed as long term investments, whose benefits will be felt over a period of at least 5-10 years.

Although landlords might face difficulties in the coming months, there's still every reason for them to think positively for the future.

What's more, in an increasingly tight mortgage market, more would-be first time buyers are being squeezed out. As less people manage to get their feet on the housing ladder, the rental market looks set to strengthen this year - a golden nugget of good news for existing buy-to-let investors.

While the buy-to-let bubble appears to have burst, it's unlikely to stay that way forever.

However, betting on buy-to-let right now is a gamble you might want to think twice about taking.

>Compare buy-to-let mortgages at The Motley Fool's Mortgage Comparison Centre

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