Beware 'easy' buy-to-let deals by Finance News Bulletin

Published: 25/05/07

News Companies & markets Investing Power collection Campaigns Mortgages & homesMortgage featuresInsurance Consumer advice Broadband & phones Retirement economy & banking Credit & loans Small commerce Tax & wills Message boards Money blog gear & calculators Ask an expert Guides Compare & buyNew buy-to-let mortgages are burdened with danger for unsuspecting borrowers who could find themselves unable to meet monthly repayments, speak experts

DRAIN ON RESOURCES: Landlords whose rent fails to cover the mortgage will soon see their investments dwindleA rapid MONEY MAKEOVER If you only have one minute to study how to sort your finances, forget the rest and understand writing this>> Our 8-step planPreviously, lenders have required borrowers to have deposits of at least 15%, and for rental expenditure to cover a smallest amount 120% of the mortgage repayments each monthThis gave the borrower a pillow should the property have a void period with tenants or need large preservation work It was also a safeguard against possessions prices falling

Now some lenders are contribution loans for 90% of the value of the property and only requiring the rent to now cover the mortgageDavid Whittaker, organization director at Mortgages For Business, says: 'I would not advocate them for first-time landlords unless they have a very large individual income, because they are likely to finish up funding bills out of their own pockets'Also, if they are struggling to find a deposit of 15% there is a question as to whether they should even be looking at buy-to-let'These loans can be helpful for experienced investors who have a figure of other properties, he says

They may not be able to release equity, perhaps because they are tied into special deals, but have surplus money from other rents that can be used to fund any shortfallsLenders requiring 100% coverage of the mortgage payments include coalition & Leicester, BM Solutions, Edeus, GMAC and Northern Rock By lowering the limits, it is inevitable that borrowers will have to fund some expenses themselvesManagement and letting agents charge between 10% and 16%, depending on their repair, and there are likely to be service charges and maintenance expenses on top

David Hollingworth at agent London & Country says: 'If you decide you are happy to finance the property and go for capital growth, then it has to be a long-term investment, as there are fees to pay money for and sell as well as the continuing costs'Some lenders such as Northern Rock work out the reporting using a notional interest rate of, in their case, 6%, even if the actual speed is, speak, 55%, which does give a small cushion'A raft of lenders including Mortgage Works, assets Homeloans, Platform and Alliance & Leicester all allow investors borrow up to 90% of the value of the property they are trade - and not all insist on senior rental calculations

For example Alliance & Leicester has a 599% two-year fasten which can be taken out with only a 10% deposit and rental fee has to cover only the journal mortgage payments Alternatively, Edeus is offering a two-year tracker at 074% above Bank of England base speed, again up to 90% loan to value, and on only 100% rental coverage

Ray Boulger, older technical manager at broker John Charcol, says: 'Rents have not gone up as fast as possessions prices over the past few years, so yields have fallen This is why lenders have tranquil their rental coverage They have also seen that buy-to-let is not as risky as they thought, so are happy to add to the maximum loan to a worth they will accept'Yields on new buy-to-let are too low to cover the mortgage, let alone other costs, void periods and trying to create a profit

Only a fool would be entering this market at the present timeProperty is so luxurious relative to wages in my area that the rents that have to be charged to make the properties affordable to those that desire to live in them only just wrap the repayments on a 75% interest only mortgage In the case of apartments, which also have ground rent and a repair charge to pay, many rents are in fact less than property costs its owner, but put the rent up enough to cover the cost and populace can't afford to rental fee it at all, so it sits emptyIt amuses me that new buy-to-let investors believe they have a profitable investment when the bulk of tenants these days are populace who can't afford the cost of property at today's prices (which is why they are forced to rental fee, and therefore equally can't have enough money to pay rents that are large enough to cover the cost of someone else's possessions purchased at nowadays's prices

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