Problems mount for buy-to-let

The buy-to-let sector has been rocked by the possibility that Paragon, the leading buy-to-let loan specialist, may cease trading in its current form or be sold.

In addition, rentals yields (rent as a percentage of a property’s value) have now fallen to an average of 5% in England, and higher interest rates are also eating into landlords’ profits.

The Royal Institution of Chartered Surveyors (RICS) recently described buy-to-let as a “rich man’s game” and Paragon’s decision to cut back its lending will give competitors a free reign to increase the cost of loans to landlords.

According to David Stubbs of the RICS, newcomers are finding it difficult to enter the market because would-be investors need a deposit of 30% of property value, or £65,600, for the average house.

This compares with 8% of property value, or £10,100, at the beginning 2002.

Some landlords, enticed by generous offers on new-build flats, are having difficulty finding tenants because of oversupply; values on some developments have fallen by up to 30%.

Experts are advising landlords with empty properties to reduce rents if necessary and also to shop around for a cheaper mortgage.

Jonathan Cornell of estate agents Hamptons International, suggests that investors struggling to find tenants should reduce the rent and top it up themselves if possible.

He believes that “Selling is the most painful option. If you can afford £100 month yourself, it might help you get a tenant. It will also buy you time, in 18 months it will be a more relaxed environment to sell in.”

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