By David Wallace, of the Cumberland Building Society

Last updated 08:43, Monday, 31 March 2008

• Vist the Cumberland Building Society website

The key: If your buy to let proposal has the ability and flexibility to meet any anticipated changes in circumstances, then you have a good foundation to build upon

Over the last decade or so, the number of buy to let investors has grown substantially, driven by low interest rates and increasing house prices.

In 1996, when buy to let mortgages were first introduced, 20,000 were taken out. By September 2007 this figure had grown to 990,000, and the total amount borrowed to £116bn.

Reports in the media have recently highlighted the problems facing the buy to let sector.

Despite falling interest rates over recent months, buy to let mortgages are generally becoming more expensive due to the ‘credit crunch’ and, in addition, investors are finding that on the expiry of their current fixed rate or discounted deal, follow-on products may not be available or may be more expensive. Costs to switch to another lender can be substantial.

In the current economic uncertainty, banks and building societies are taking a more cautious approach. Some have withdrawn buy to let products altogether. Investors can now be expected to place a larger deposit than they have done previously.

Many lenders now also require that the rent on any prospective buy to let property equates to more than 125 per cent of the monthly mortgage interest payment.

There has also been an increase in regulation with the introduction of a new licensing scheme for multiple-occupancy houses, which ensures the property and landlord adhere to certain standards before it can be legally rented.

New investors will also need to be aware of the Tenants Deposit Scheme, whereby deposits are no longer held by the landlord, but by an independent, Government-appointed company.

It has also been reported that the Government has launched a review of the private rental sector so there may be further changes in the future.

Has the bubble burst? No. The total value of buy to let mortgages has increased from the last quarter of 2006 to the same period in 2007, however investors may now find it more difficult to get a mortgage and may also need to put down larger deposits and ensure that the rent covers the mortgage payments to meet lenders criteria.

In the current market conditions, investors need to do their homework to minimise the risks involved.

It is important that you consider the “what if” factors.

In terms of your mortgage payments, what if payments increase through rising interest rates, or through the expiry of your current deal?

Can you meet the costs of arranging a new product or remortgaging to another lender?

You need to consider the length of time you can let your property and what happens if you are unable to replace a tenant straight away and can only let the property for nine months out of a possible 12.

What happens if you need to consider a lower rent to secure a tenant, or are presented with unexpected repairs?

If your buy to let proposal has the ability and flexibility to meet any anticipated changes in circumstances, then you have a good foundation to build upon.

For details of the Cumberland’s range of buy-to-let mortgage products visit www.cumberland.co.uk

• David Wallace is commercial lending manager at Cumberland Building Society. Visit the website at www.cumberland.co.uk.
• This article should not be relied on when making investment decisions. Always seek financial advice.
• Your home may be repossessed if you do not keep up repayments on a mortgage or any other debt secured on it.