New challenges build for buy-to-let

Landlords face difficulties on several fronts, including the difficulty of getting a competitive buy-to-let mortgage and a fall in rental prices. But one problem arising with increasing regularity for landlords is non-payment of rent as more tenants become victims of the job market downturn, according to John Blackwood, director of the Scottish Association of Landlords.

"Our advice line has taken an unprecedented number of calls from landlords experiencing problems with tenants not paying rents," said Blackwood. "It is often two or three months down the line before a landlord knows a tenant has lost their job or got into financial difficulties, but landlords have to be professional and work with the tenant as much as they can."

Many tenants concerned about job security are extending their existing leases instead of moving on. While this is good news for some landlords, it compounds the difficulties of those with voids (where a property has no tenants and therefore provides no rental income).

"The market is incredibly sluggish, especially in the east of Scotland, so there is no ready supply of new tenants," said Blackwood. "Tenants are staying in rental properties for longer, so if a landlord has a void it tends to be for longer than usual."

That the supply of rental property outweighs demand is currently the overriding issue for many landlords, according to Colette Murphy, director at Braemore Property Management.

"There's a lot more stock so rental levels are probably vulnerable. If there are not enough tenants then rents will go down and that is a concern for buy-to-let investors."

Murphy added that there had been a new surge in "reluctant landlords" since Christmas, with more opting to rent out property that isn't selling.

The problems are exacerbated by the shrinking mortgage market, especially for landlords with voids.

While those on trackers are benefiting from falling costs, the supply of mortgage funding has dried up for landlords with less than 25 per cent equity in their property. Deals of between 10 per cent and 15 per cent, which used to make up over 61 per cent of the market, are no longer available, according to Moneyfacts.

"This is particularly an issue for landlords who bought their property in the last two or three years," said David Kendall, the National Landlords' Association's regional representative for Scotland. "Six months ago most landlords would have got 85 per cent mortgages, but as these deals come to an end there is a potential hike in repayments and a problem remortgaging as most lenders are looking for 25 or 30 per cent deposits."

Then there's the spectre of repossession. There was a 302 per cent increase in the number of buy-to-let properties taken into repossession between March 2007 and the end of June 2008, according to fund managers Managing Partners Limited. And early evidence suggests repossessions are on the rise this year already, said Blackwood. "We are hearing about more buy-to-let repossessions and more notifications of repossession, and fear this trend is on the increase."

Kendall concurred. "I am aware it is on the increase. Historically buy-to-let was always a safer bet for lenders than residential mortgages, but it is not the case any more as a lot of people bought at the market peak without researching the market properly."

But Murphy at Braemore said that of the 850 properties on its books, there were only four repossessions last year.

"At the moment, we don't envisage repossessions becoming a major issue for the rental market in Edinburgh. However, things can change very quickly so we will be monitoring the situation carefully."

It isn't all doom and gloom, however. The big picture for buy-to-let investors remains positive, believes Kendall, provided landlords are in it for the longer haul. "The underlying demand for rental is very strong. As the age of the average first-time buyer rises, with mortgages harder to get, and private renting becomes more acceptable, rental demand will grow."