Buy-to-let lender shuns new flats

Britain's army of buy-to-let landlords suffered their second blow in a week after one of the sector's biggest lenders halted the sale of mortgages for newly built flats.

Portman building society, which lends to buy-to-let investors through its The Mortgage Works subsidiary, said there was an over-supply of new flats, and this had led to problems with property valuations.

It admitted the move was to prevent "over-lending" - giving investors too big a loan in relation to the value of the property. Director of The Mortgage Works, Matthew Wyles, said: "We have over-lent in some cases. And we don't want to do more. We are jumping out of this market before there is any chance of the Portman losing money. We would rather be prudential and pull out rather than not getting the risks right."

It will now refuse buy-to-let mortgages on flats less than a year old. Its decision could lead to fresh fears over the health of the buy-to-let sector, and comes on the top of Gordon Brown's surprise decision to scrap a tax break that would have allowed the rich to put residential properties into pensions.

During the last few years, blocks of flats and apartments have sprung up across the south-east and in cities such as Manchester and Leeds, as developers and property clubs cashed in on the buy-to-let frenzy.

Roland McCormack, managing director of Bristol & West Mortgages, said: "You can end up lending on too many two-bedroom flats in a block. Many are over-priced so you have to look at the real valuation and ignore all the free gifts and other incentives such as guaranteed rents."

There is now a glut of new property in some areas which makes lending for investment purposes "just too risky", said broker Chase De Vere.

Mr Wyles said some developers were prepared to do deals on price outside of the formal contract. In these cases the lender may be unaware of the actual price being paid, and ends up relying on a valuation which may be based on "erroneous assumptions". He added: "We will go back into new-build buy-to-let when we believe that the market forces of supply and demand have reached equilibrium."

Bradford & Bingley, with 20% of the buy-to-let market, said it had no plans to withdraw from new-builds. However, it deducts the value of any incentives the developer is offering and will only lend up to that amount.