Prior to the onset of the global economic crisis, buy-to-let mortgages were a dominant force in the UK housing market, with many investors viewing them as a safe and stable way to generate strong returns.
However, with the collapse in house prices seen towards the end of 2008, there has been a sharp decline in the number of people interested in buy-to-let mortgages, as well as a large reduction in the number of deals available.
And while there are still opportunities to invest in buy-to-let properties, many buyers may be feeling rightly cautious about taking on large debts while house prices remain weak, the rental market remains highly competitive and the prospects for economic recovery remain decidedly flat.
Tracking the rise and fall
Figures from the Council of Mortgage Lenders (CML) have shown that as the buy-to-let mortgage approached its peak in the first quarter of 2008, 12 per cent of all mortgage funding handed out in the UK was given to buy-to-let investors.
During this period, the mortgage products were being hotly touted as a lucrative long-term investment vehicle that would allow people to benefit from house prices that seemed to be rising incessantly.
In the first three months of the year, mortgage lenders approved 72,400 new buy-to-let loans to investors keen not to miss out on this opportunity, allowing them to purchase properties worth a collective £9.5 billion.
However, over the next 12 months, the buy-to-let market suffered heavily as house prices began to tumble and lenders became averse to taking on any more debt while banks and investment groups around the world shook and crumbled under the weight of the economic crisis.
By the first quarter of 2009, the value of new buy-to-let mortgages had shrunk to £2.1 billion, with 22,400 new loans advanced during the period.
This in turn caused many experts to announce that the buy-to-let bubble had burst and predict that there was scant chance of recovery, let alone future success.
A poll conducted by Unbiased.co.uk has revealed that many potential investors have taken heed of such comments and are sceptical about the value of investing in buy-to-let property.
The older generation appeared particularly adverse to such investments as ten per cent of over-55s predicted that those who do have a stake in the buy-to-let market stand to lose a lot of money.
Younger generations, on the other hand, were more optimistic about the products, with one in ten people aged 18 to 34 found to believe that there was considerable money to be made in investing in buy-to-let.
Dead and buried?
Although the buy-to-let mortgages suffered heavily in the financial crisis, some experts have alerted investors to the prospects for growth that arise when a mortgage product hits rock bottom.
International property consultancy Assetz has claimed that the buy-to-let market is likely to improve substantially as the economy recovers from the economic crisis, although it predicts that a loss is to be expected in weakened market conditions.
Unbiased.co.uk also reminds would-be investors that while the Bank of England has reduced interest rates to record lows, this is yet to translate into lower rates on buy-to-let mortgages, which remain substantially higher than residential home loans.
So too, potential investors will need to find a large deposit to be approved for a buy-to-let mortgage, with most lenders only extending finance to those who can make an initial cash down-payment equal to 25 per cent of the property's value.
Keep an eye on the rental market
Although such restrictive conditions may lift as the housing sector begins to recover, investors may also do well to consider the state of the rental market before applying for a loan.
In many parts of the country, there is currently an oversupply of rentable properties on the market, particularly in large towns and cities.
With supply outstripping demand, rental prices have also been falling in many areas, meaning that the return on investment for a buy-to-let property may be weak until the balance is restored.
Indeed, falling rental values have been an important cause of the rise in the number of buy-to-let mortgages in arrears, as debtors have been unable to keep up with repayments as the amount taken in rent has fallen.
However, the Residential Landlords Association has explained that while the number of arrears has increased, repossessions of buy-to-let properties have stayed fairly constant despite the weakness in the housing market, suggesting that banks are keen to ensure that such measures are always a last resort.
For those who do feel confident enough to invest, it may be worth speaking to an independent financial adviser before making their leap into landlordship.
To compare the latest buy-to-let mortgage rates from leading UK lenders click here.
Author: KYM Editor
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