Buy-to-let a bad bet?

The boom years are coming to an end for buy-to-let investors as equities begin to recover and interest rates look set to rise, according to a report out today.

Market analysts Datamonitor said that the uptake of buy-to-let mortgages had increased by over 50% in 2001, with borrowing for the purpose of buying-to-let rising from ?3bn in 1999 to ?6.6bn last year.

However, the organisation said that the buy-to-let market was now set to slow, cooling to a growth rate of 4.7% a year by 2006, compared to the double digit rises seen over the last three years.

It based its prediction on the combination of an anticipated rise in mortgage repayments as a result of interest rate rises, a recovery in the equities market making equity investment more appealing again, and possible regulatory changes in the rental sector giving tenants more freedom over landlords.

Datamonitor said that, so far, rental demand has been sustained in the main by the growth in the number of people renting later into life. The average age of first time buyers has risen from 32 to 34 in the last four years.

It also pointed out that a burgeoning buy-to-let mortgage market had made it easier for landlords to finance a property to rent. In 1998 only 30% of mortgage lenders offered buy-to-let products, and these products were often limiting. By April of this year, however, 60% offered at least one, and frequently several, buy-to-let mortgages.

Mortgage lenders have been increasingly willing also to offer investors a higher maximum loan to value, a move property consultants FPDSavills said yesterday created a dangerous situation for some landlords who could find themselves overstretched financially as the market become saturated and rents fall.

However, Datamonitor said that its research had concluded that buy-to-let investors generally take a "rational, businesslike approach" to their purchase, and were unlikely to be dramatically affected by a change in market conditions.

"Few buy-to-let investors will panic into making rash, short-term decisions based on a collapse in house prices alone," said author of the report and financial services analyst, Richard Cole.

Datamonitor predicts that over the next five years, the buy-to-let mortgage market will contract as smaller independent companies feel the pinch. It said investors will benefit from increasingly competitive product offerings from the remaining providers.

"For shrewd, informed investors with a suitable long-term outlook, buy-to-let can still offer a good investment if buyers are willing to research their purchases thoroughly," said Mr Cole.