The popularity of buy-to-let investment has grown significantly over the last few years, with investors piling into a market enjoying strong capital growth and offering generous returns that have out-performed many alternative investment vehicles. However, more recently, the buy-to-let landscape has become significantly more challenging.
Interest rates have increased 5 times since summer 2006, while rents have begun to stagnate. With rental yields at only around 5%, many investors are paying higher rates of interest just to cover their buy-to-let borrowing. Furthermore, they are paying out more without the peace of mind of being able to bank on significant capital growth to come, as property prices begin to fall across the country and the volume of sale transactions is predicted to drop in 2008.
For new buy-to-let investors, the challenges are more immediate. Due to the recent ‘credit crunch’, mortgage lenders have tightened their lending criteria, making it more difficult for investors to get started and charging higher variable rates to their existing customers. According to the Council of Mortgage Lenders (CML), the number of buy-to-let mortgages taken out in the first 6 months of this year has fallen by 3% compared the previous 6 months.
According to research from the Royal Institution of Chartered Surveyors (RICS), an individual investing in buy-to-let property 5 years ago would have required a deposit to the value of 8% of the property purchase price. These days, the figure is closer to 30%.
Ian Springett, Chief Executive of Primelocation.com, comments, “For some individual investors, the buy-to-let market may be starting to slip out of reach as transaction costs and increasing property prices stretch budgets to the maximum. At the same time, some investors will no doubt be tempted to take advantage of recent price inflation and to sell while they are well ahead”.
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