Record leap of 20% in buy-to-let loans squeezes first-time buyers

Borrowing by buy-to-let landlords hit a record high of £17.5bn in the first half of 2006 as looser lending criteria and rising rents prompted investors into a property buying spree.

According to a survey released yesterday by the Council of Mortgage Lenders (CML), banks advanced 152,500 house loans in the first half of the year - an increase of 17% by volume and 20% by value over the previous record totals, posted in the second half of 2005.

There are now 767,000 residential buy-to-let mortgages in Britain, worth £83.9bn. The strong growth in buy-to-let borrowing contrasts with a slower increase in the broader residential market. Buy-to-let now accounts for 8% of the value of outstanding UK lending, compared with 7% in the first half of 2005.

Major buy-to-let lenders raised lending limits to landlords this year to £10m for a portfolio of properties and allowed many more loans per individual. Previous requirements that rental income should equal at least 130% of the loan repayment have also been relaxed, in many cases down to 100% of the cost of servicing an interest-only mortgage.

The extra financial firepower that cheap lending has given landlords means they are more able to outbid first-time buyers. But the lenders say landlords are a better risk than first-time buyers; according to yesterday's CML figures, the proportion of buy-to-let mortgages in arrears of three months or more rose only slightly, from 0.68% of the stock to 0.73% in the first half of 2006. That compares well with the wider market, where 0.96% of borrowers were three months or more in arrears in the same period.

CML's director general, Michael Coogan, said: "The buy-to-let market remains robust, underpinned by strong rental demand. But investors have shown that they are quick to adjust to changing market conditions, so the view that interest rates are now more firmly on an upward trend is likely to cause the rapid growth of buy-to-let investment to slow in the coming months.

"Fundamentally, however, the rental market remains sound and looks set to continue to offer good long-term prospects for astute investors."

In the latter half of 2005, buy-to-let lending slowed amid falling yields and negligible capital growth. Demand for rental properties has bounced back, buoyed by migration from EU accession countries. Milan Khatri, chief economist at the Royal Institution for Chartered Surveyors, said: "The news is not so good for first-time buyers, with house prices continuing to rise and the alternative of renting steadily becoming more expensive, with RICS letting agents stating that in the second quarter rents are rising at their fastest pace since July 2001."