Buy To Let.


Gaynor Pengelly is a business and travel journalist who writes for The Mail on Sunday, Independent, CityAM, Yorkshire Post and various glossy magazines. Previously, Gaynor worked as business travel editor at The Mail on Sunday and was also interviewer on The Mail on Sunday’s Rich Report, a glossy dossier on Britain's wealthy. In 2000 she was nominated for a British Press Award.

IS the buy to let bonanza over? That is the question my husband and I are pondering, As a young couple faced with a happy but unexpected pregnancy we downsized to an apartment two years ago, in the knowledge that one-day we would need to climb back up the property ladder.

The decision to move was an easy one. We had bought our lovely, big house three years earlier on the strength of two good wages, but then along came baby and our finances took a turn for the worse. Pricey baby paraphernalia, nursery fees, soaring utility bills, crippling council tax and increasing mortgage rates were slowly eating into our earnings.

And with only one breadwinner bringing in the readies - while I took time out to raise our son - it made financial sense to move to a smaller property and pay off our mortgage. We knew that we were taking a chance with house prices, so our game plan was to buy a second property as soon as we could afford it and let it out.

Since moving into the apartment, we’ve come to like the downsized lifestyle. It’s green, low stress, low cost, easy to manage and the ideal way to live with a small child. We sometimes wonder why people pay so much regard to big houses, especially when they come with crippling mortgages. But while my husband and I have seen the value of our property shoot up, we are aware that our total equity is increasing more slowly with the downsize.

The property ladder has seemed more like a fast-moving escalator in recent years and we sometimes wonder if we have gone back to using the stairs. With an addition to the family, we are not only looking to our own financial future, but concerned that we can pass something on to our son, especially in light of the financial difficulty experienced by first time buyers. We’ve looked on in envy as family and friends reaped financial rewards from the great buy to let bonanza, and understandably we want a slice of the action too.

And we are not alone. According to consultants, Mintel, around 3% of Britons say they want to buy at least one rental property by 2010, even though property prices are soaring at nearly £300 a day. Disillusioned by the pensions crisis, people are now ploughing their money into bricks and mortar and viewing their buy to let investment as a more significant part of their pension plan. Indeed, industry figures show that the number of buy-to-let mortgages have soared over the past decade. Last year another 330,000 buy-to-let mortgages were taken out, up from just 44,000 in 1999 when the market was still in its infancy. Up until a few weeks ago, the decision to hold on to our charming pied a terre and rent it out; when we bought a second home was a no-brainer. A buy to let mortgage would provide us with the means to buy a new home but retain and rent out our existing one.

And the best part about becoming a landlord was that someone else would be paying the mortgage repayments on our new property. In other words, we would be “sitting pretty” while our two properties continued to rise in value, providing the perfect nest egg for our retirement years. It’s not rocket science but surely we’ve discovered a perfect pension plan. Or so we thought. In today’s climate, it’s not so easy to sit back and rest on your landlord laurels. With the cost of living rising at its fastest rate for 15 years, personal debt starting to bite and an increase in mortgage arrears, there are genuine fears that the future could become tough for Britain's landlords.

Economists predict that the bank rate will rise from 5.25% to 5.5% next month, as the Bank of England seeks to bring inflation under control, with a possible further increase to 5.75% in summer. Some even think 7.5% will be necessary to curb inflation. A report out this week by consultants Mintel says the number of buy to let landlords could double within three years despite fears of a property crash. “Increasingly, property owners are seeing the benefits of investing in bricks and mortar and often regard the second homes market as a good alternative means of saving for retirement," said Paul Davies of Mintel.

"As long as these trends continue, future growth in this market should be guaranteed.” But Davies fears that investors wrongly assume buy to let provides a guaranteed income. "Prices have been going up for a decade. People see buy-to-let as a sure-fire bet, he warned: “But many have forgotten the early Nineties when house prices fell. Younger investors have never experienced a falling market." The Mintel report follows a stark warning from a former Government mortgage adviser that a house price fall is "very likely".

Indeed, experts say the rise in property prices of an inflation-busting 12 per cent is unsustainable. And gross rental yields - the annual gross rent as a percentage of the home's value - have fallen to five per cent. This is below the interest paid on a good savings account. (By comparison, six years ago, the yield was more than 7.5 per cent). The Association of Residential Letting Agents says amateur investors are flooding the market. Many see their property as their pension, which financial experts warn is highly dangerous. If house prices fall sharply, they will not just see the value of their homes collapse, but their plans for paying for their retirement will crumble too.

So, in this climate of uncertainty, is now the right time for us to be dipping our toes into the buy to let market?
Is the golden era of soaring property prices well and truly over? Worst still, is the property market set to slump?
Have we missed the buy to let boat? Or is this the perfect time to be jumping on to the bandwagon?
Will rental yield on our investment property help to cover the cost on our mortgage? Or will interest rate hikes leave us struggling to meet out monthly repayments?

Over the next few days we will be seeking answers to these questions from a wide-range of property experts. So watch this space.