Henry Pryor on Property

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Buy-to-let property is the ticking timebomb under house prices. With the foundations of the market now starting to show financial subsidance, concern about this un-regulated sub-market has started to attract greater attention.

Bradford & Bingley posts loss

Now the country's fifth largest lender, Bradford & Bingley has made an £8m pre-tax loss in the first four months of this year and spooked the stockmarket, sending its shares into free-fall. The company has blamed problems on its buy-to-let mortgages. Bradford & Bingley have about a fifth of the UK 'but-to-let' market which is worth about £126bn, but lenders exposure to these relatively new products may be far higher.

Buy-to-let failure has a big impact on property prices. While in a boyant market buy-to-let landlords snap up properties that would otherwise be bought by first-time buyers, and thereby increase house price inflation, when the market turns, the additional properties that amateur landlords find they cannot afford are dumped on the market, therefore increasing supply.

Until now, it had been thought that this could add only a small number but, as we shall see, there are in fact many more private landlords than the buy-to-let statistics reveal.

In the past few weeks it has emerged that there are a significant number of supposedly solid 'owner-occupier' mortgages which were in fact used by private landlords who have subsequently let their property in breech of their mortgage agreement.

Specific buy-to-let mortgages are in fact a comparatively new product. They have traditionally cost slightly more than a mortgage for an owner occupier. Some individuals with traditional mortgages have gone on to let their property when they have got married or left university, seeing it as a property investment and an alternative to a stockmarket based pension.

Many landlords 'cheating' on mortgage companies

According to ARLA there are over 2.7m private rental properties in the UK but we know that there are only around 1m official buy-to-let mortgages. While some, of course, will have no borrowings at all, many will have traditional 'owner-occupier' mortgages which tend to stipulate that the property can't be let without the lenders consent.

Buy-to-let mortgages usually require a higher deposit (typically 85%) and often attract a higher borrowing rate and it is unusual for the terms of a mortgage to be checked when a private letting is arranged.

I think there may be up to 100,000 mortgages that lenders think are being lived in by the borrower but are in fact unofficial buy-to-let products. Despite reports that rents are rising it is becoming harder for amateur landlords to cover the higher borrowing costs that many are facing.

This will only add to the problems that lenders like B&B say they are experiencing and add to the downwards pressure on the housing market as these 'investments' are dumped when rental income falls short of the cost of the mortgage.

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