Buy-to-let: is it a boom or a bubble fit to burst?

People borrowing to be landlords could face the same restrictions as homebuyers, with MPs voicing fears that property speculation may be overheating the market

All the signs have been pointing up for buy-to-let, but there are clouds on the horizon (Getty Images)

Buy-to-let has been one of the UK's financial success stories. While it may have dipped in the worst years of the credit crunch, lending to residential property speculators is almost back to pre-2008 levels.

But there is now increasing concern that amid a UK hosing crisis, buy-to-let may be part of the problem, not the solution.

According to the Council of Mortgage Lenders, there were 16,000 buy-to-let loans worth £2.2bn approved in May 2014. In 2013 buy-to-let accounted for 14 per cent of all mortgage borrowing, compared with 11.5 per cent in 2012 and 9.5 per cent in 2011.

Rob Saunders at comparethemarket.com reported that the comparison site had seen interest in buy-to-let mortgages jump 70 per cent since the start of the year.

He said: "Buyers are looking at higher-value loans which have jumped from an average of £108,453 in 2013 to £123,026 in 2014 – an increase of 13 per cent.

Buy-to-let was once was the preserve of professional landlords but plummeting pension returns, poor savings rates and stock market uncertainty have led many homeowners to see their house or flat as a safe asset, not just a place to live.

Two years ago, the mortgage broker John Charcol noted a dramatic rise in first-time buy-to-let borrowers. It said it was getting an increasing number of applications from homeowners in their late 40s and 50s – normally those with substantial amounts of equity –choosing to let rather than sell their homes.

Another reason for the increase in landlords, many mortgage brokers believe, is the availability of the loans. Buy-to-let mortgages are not regulated in the same way as normal homebuyer loans so are not subject to the same lending restrictions – including the stricter criteria introduced as part of the Mortgage Market Review in April.

Buy-to-let mortgages do have higher interest rates and a much higher minimum deposit, usually a quarter of the property's value, but investors can use equity in an existing property to help with the purchase of another.

For all the bright prospects for the market, however, there is also a cloud. This week, MPs on a Treasury select committee expressed concern that buy-to-let could be causing issues for first-time buyers, by reducing the supply of available properties and forcing up prices still further.

They said they were worried that it had the potential to destabilise the housing market and asked Mark Carney, Governor of the Bank of England, if there was anything the central bank or regulators could do to restrict it.

The MPs also expressed concern that huge amounts of investors' cash could be pumped into buy-to-let when pension fund liberalisation comes into force next year.

Mr Carney said there were no immediate plans to restrict lending but said the bank would be watching the market 'very closely'.

Andrew Bailey, Deputy Governor of the Bank, also reiterated its concern that a continuing rise in house prices remained the biggest threat to the stability of the UK economy. He said it would be keeping an eye on investors who had bought multiple properties and whether the trend could cause the housing market to overheat in some areas.

One disgruntled buyer, who has a deposit of £25,000 and is trying to buy a flat in a Home Counties town, contacted The Independent: "I earn £62,000 a year and cannot find a three- bedroom place for my family. We may be forced to rent at around £1000 plus a month. A lot of the properties where I want to buy tend to end up with cash buyers and are then let out. In effect these people are getting people like me, who can't buy a mortgage, to pay their mortgage."

This week one bank brought in restrictions. The Royal Bank of Scotland (RBS) group, which owns NatWest, introduced a 4.99 times income multiple limit per application for all buy-to-let business, with effect from Monday.

The maximum loan to value (LTV) for buy-to-let mortgages will remain at 75 per cent and the maximum loan size will still be £500,000.

NatWest said the measure was needed to maintain affordability and to safeguard its customers from borrowing too much. It added that the change is designed to achieve greater consistency between buy-to-let and residential lending.

Trevor Abrahmsohn, managing director of the estate agency Glentree, admitted that buying multiple properties using equity in other properties was questionable in areas where first-time buyers are struggling to get on the property ladder.

He said: "The problem is, a lot of people have been forced into looking at property because of changes made to pensions. Disillusionment with state and private pensions has been rife and, quite rightly, consumers are turning to buy-to-let investments as an alternative.

"This process has been exacerbated by the constant clawing back that successive governments have done with private pensions to the extent that buy-to-let investments, despite their tax inefficiency, have done far better by way of yield and capital growth than most other investments."

Mr Abrahmsohn added: "Only 80,000 new homes are built per annum. There is a finite supply of homes and demand is not only from the local market but also the international market where buyers from the far-flung parts of the world want a part of English heritage.

He said that the Government's Help to Buy scheme was also pushing up demand.

"Would I recommend buy-to-let as an investment?" Mr Abrahmsohn asked. "Well I still would, as long as everyone is reasonably savvy that investments do go up as well as down at any point in time."

David Cox at the Association of Residential Letting Agents claimed that buy-to- let lenders were already in effect regulating themselves, but he acknowledged that more could be done to prevent amateur property speculation.

He said: "Lenders could impose additional criteria on landlords, such as becoming accredited or using a licensed agent, in order to ensure potential investors understand their responsibilities when letting property.

"Currently, anyone is able to invest in a buy-to-let property, and this growing trend has the potential to boom further next year when pension reforms come into effect and allow investors to pour freed-up pensions into buy-to-let properties, which are currently seen as attractive income investments."

Simon Zutshi, founder of the Property Investors Network, claimed that the lending restrictions introduced in April by the Mortgage Market Review may have had the unintended consequence of boosting buy-to-let. He said: "Ironic as it may be, I believe that some of the controls ... introduced to the residential mortgage market may be indirectly fuelling the buy-to-let market boom.

Mr Zutshi explained that the 90 per cent LTV cap on residential mortgages, with a maximum multiplier of 4.5 times combined income, had led to more people having to rent because they could not meet the stricter criteria. He said: "Investors will buy investment properties for as long as there is a rental demand."

James Priday, managing director of Prydis Wealth, warned that buy-to-let may not be quite the great investment that it seems.

He said a mortgage against a property is a loan, and this means any capital gains and losses are multiplied in a way that would not apply to a wholly owned asset.

"This can be a good and bad thing but a risky business. As a simple example, if you buy a property for £100,000, putting down a £20,000 deposit and borrowing £80,000, a 10 per cent rise in property prices increases your deposit by 50 per cent. But if property prices fall by 10 per cent, you will have lost 50 per cent of your original money, which is a large loss in anybody's book, and a potentially risky investment if you need to sell in the short term."

Property investment also comes with additional costs. Mr Priday said: "The gross return is the combination of the rental income and any capital growth, but people must deduct any costs from this – be they legal fees, mortgage interest, repairs and maintenance etc. They must then factor in the capital gains and income tax payable on the returns to arrive at the net amount that ends up in their pocket. All costs and tax can easily erode 30 to 40 per cent of the gross return."