Watch out: Buy-to-let is back....

The buy-to-let market is heating up again - be afraid. Be very afraid....

Bad news for all you first-time buyers out there. Just when you thought it was safe to go back into the housing market, buy-to-let is back.

Gross buy-to-let lending increased between July and September for the first time in two years, according to the Council of Mortgage Lenders (CML). This was no itsy-bitsy increase, but a 10% jump on the previous quarter.

The number of loans advanced rose from 21,600 to 23,700, with total new lending worth £2.1 billion, mostly for new purchases rather than remortgages.

This is from a low base, but the CML proudly boasts that "buy-to-let is here to stay". If you've read my thoughts on the subject here and here, you will understand that I'm not best pleased.

Buy-to-what?

Buy-to-let investors must be keen, because getting finance still isn't easy. You need at least a 20% deposit plus a four-figure arrangement fee. The Mortgage Works demands a 40% deposit and a stonking 3.5% arrangement fee, which would cost a might £5,250 on a £150,000 property.

Other market-leading buy-to-let mortgage deals carry arrangements fees of between 1.75% and 2.75%, or flat charges of £2,000.

Lenders are also wary about offering mortgages on city centre apartments, particularly in northern cities such as Manchester, Liverpool, Leeds and Newcastle, where the buy-to-let bubble burst messily last year.

You would think that given the uncertain economy, and the expense and difficulty of getting finance, buy-to-let investors would be keeping their heads down.

But with prices still down on last year, and mortgage finance cheap, many think they have spotted a sweet spot.

Property is more affordable than at any time since the mid-1990s, according to a new report from Lombard Street Research. But the window of opportunity is closing as house prices rise faster than expected. The point of maximum affordability has already passed.

Happy days

Two groups of people celebrated the demise of buy-to-let. The first, ironically, was successful buy-to-let landlords. They watched overstretched amateurs fall by the wayside, and added to their property portfolios while prices were low. With a proven track record and spare equity aplenty, getting cheap finance was a doddle.

The second group, inevitably, was first-time buyers, who faced less competition from amateur landlords and stood a marginally better chance of getting their dream home.

The return of buy-to-let will make life even harder for them. First-time buyers now face an incredible four property market catch-22s, and with apologies to Joseph Heller, here they are.

1. The affordability catch-22. When house prices are rising and finance is easy, first-time buyers can't afford to buy because property is too expensive. But when prices fall they still can't buy because nervous lenders won't give them the finance.
2. The spare equity catch-22. The only people who can afford to buy a home are those who already own one, because property is too expensive unless you have previously made a killing on the market.
3. The buy-to-let catch-22. Most first-time buyers will only enter the market when prices are affordable and finance available, at which point buy-to-let bargain hunters start buying up all the cheap property.
4. The market timing catch-22. This one scares first-time buyers most. The moment you finally decide to leap into the property market is the point at which it collapses, drowning you in negative equity.

My friends Rachael and Chris know all about these catch-22s. Their quest to buy a tiny ex-local authority pad in a dodgy south London estate has so far fallen foul of the first three, and they have an underlying terror of the fourth. And there are plenty of people like them.

Not so hot-to-let

I don't actually think buy-to-let is that good an investment, unless you're an experienced and committed landlord.

Remember, you can get a risk-free, long-term investment yielding more than 5% a year by opting for a five-year bond like the Skipton Building Society Fixed Bond. It pays 5.35% AER until the end of November, 2014.

You can apply online in a matter of moments and there are no repairs, maintenance, wear and tear, void periods, dishonest tenants or four-figure mortgage arrangement fees to worry about.

Obviously, you won't borrow £100,000 to invest in a bond, but maybe that isn't a bad thing either.

Goodbye-to-let

Earlier this week, I suggested that thanks to low interest rates, House prices won't fall again for years.

I said that if first-time buyers can find the right place without overstretching themselves, and planned to live there for several years, they might as well take the plunge.

I would advise a newbie buy-to-let investor differently. The market has recovered slightly, but the glory days aren't going to return for many years. There are easier ways of getting a similar yield and capital growth, with similar risks.

If you are an experienced landlord, with plenty of spare equity and reliable tenants in your other properties, then frankly you don't need my advice.

Buy-to-let is back. Approach with caution.

If you're still not convinced, and want to get into buy-to-let, at least make sure you do it right by adopting this goal: Become a buy-to-let landlord.

Compare buy-to-let mortgages at lovemoney.com