Landlords eye long-term profit

With a turbulent stock market and mortgage interest rates at their lowest level in 36 years, more people might be tempted to look at renting out property as an alternative investment, writes Pamela Swinburne .

Many are buying investment property to boost eventual pensions through the ever-expanding buy-to-let market. The idea is that rentals should at least cover the mortgage and other expenses, such as insurance and letting agents. Landlords hope to make their big gains from capital growth.

Buy-to-let mortgages are more affordable than they were five years ago and there is fierce competition among lenders, with rates as low as 3.75% and deposits of around 20%. Often they are the same cost as residential loans, ending the old practice of forcing buyers of investment properties to borrow at steep commercial rates.

The long-term outlook for investment properties looks good, according to the Association of Residential Letting Agents, which says it is expected to grow from 11.2% of the market to 15% in the next five years.

And new figures from the agents Savills show that the average net yield after expenses stands at 6.5% - enough to cover many current loans.

But as more people are lured into the buy-to-let market and the mortgage war hots up, where do you begin to trawl through the hundreds of packages on offer? How do you decide whether to go for a capped, fixed, discounted or variable rate? Some have penalties while others don't lock you in at all. You need to shop around carefully.

According to Nichola Pincher, from Chase De Vere Mortgage Management, the best buys for buy-to-let mortgages include Britannic Money's 5.99% fixed rate for two years with no penalties; Mortgage Express's 5.99% fixed rate for three years and Bank of Ireland's 6.39% fixed rate for five years.

When comparing schemes, it is important to weigh up costs, as lower rates may have bigger penalties, and to take into account any arrangement fee. For instance, Bank of Ireland does not charge an arrangement fee but it has steep penalties during the fixed rate term, whereas Britannic Money charges a 1% fee but does not charge any penalty.

Ms Pincher explains that there are standard mortgage products available through most intermediaries and on the high street, but larger intermediaries such as her own firm, or Charcol or Savills, may have some exclusive deals because of their big portfolios.

Karen Garner, of Charcol, says her company's best deals are Mortgage Express's rate of 6.35% fixed until June 2006, with an 80% loan and 1% fee; Scottish Widows at 6.25% fixed until June 2003, 80% loan, 3% penalty, with a £295 booking fee and a 0.5% arrangement fee. A fixed deal without penalties comes from the Royal Bank of Scotland, which offers 6.15% until July 2003.

But buying the wrong property can be an even more expensive mistake than a flutter on the stock market.

One of the key things to remember is location - convenience, safety and access to public transport are crucial. It is imperative that you factor into calculations the void periods when you have no tenant.

When buying property to rent out consider the running costs, rental return, fees, maintenance and service charges as well as rental growth and capital gains.

Deductions against tax on rents received may be claimed for the following: repairs, maintenance costs, insurance, cleaning, commission and other management expenses. A wear and tear allowance of 10% of the rent received may be deductible.