How will the trouble at Bradford & Bingley affect the housing market?

The sudden news of financial crisis at the specialist mortgage lender — with a profits warning and part sell-off — confirms that there are no signs of the credit crunch abating. The housing market is already suffering a major lack of confidence, but worst affected by this latest bad news will be the buy-to-let investors.

Melanie Bien, the director of the independent mortgage broker, Savills Private Finance, says: “Bradford & Bingley is responsible for a quarter of all buy-to-let mortgages, so if it reins back from the market there will be even less choice for landlords looking for a new deal or remortgaging.

Why is buy-to-let so badly affected by this slowdown?

The current slowdown is hitting amateur investors particularly hard because many have invested heavily in new-build flats in city centres, the sector in which property price falls are concentrated. Many of these landlords are having to slash rents to avoid leaving the properties unlet, just as their costs are rising. Lenders are being cautious and now view buy-to-let loans as high-risk.

Does that mean that there is no money for home loans available for investors? And what can they do?

Professionals (those who own portfolios of five or more homes) can still get good deals. Others can find loans, but must expect to pay more for their money, regardless of recent cuts in official interest rates. Melanie Bien says: “Those who are most at risk of tighter lending conditions are novice landlords who may have taken on high LTVs [loan to value] and are now looking to remortgage. Borrowers may have to invest their own money to bring down their LTV to enable them to shop around for another deal. The alternative may be sticking with their existing lender — either on SVR [standard variable rate] or a rate of about 2 per cent above base rate.”

Do the troubles for the buy-to-let sector mean good news for first-time-buyers?

Many frustrated homebuyers have blamed investors for pricing them out of the market, but the National Housing and Planning Advice Unit says buy-to-let demand has boosted average house prices by only 7 per cent. Hometrack, the property data company, says that a decline in buy-to-let could be catastrophic as it is helping to keep rents low at a time when the cost of home ownership is rising, forcing first-time buyers to stay renting for longer. Richard Donnell, its director of research, says that tighter lending conditions and the bigger deposits required mean first-time-buyers now need to find £10,000 more to buy. House prices are slipping, but rising costs mean that there is little hope of affordability improving soon.

What about existing home-owners?

Hometrack says that transactions will be 30 per cent lower this year, as most homeowners shelve plans to upgrade or relocate unless they have to. But some who are selling up are reporting that interest from buyers is brisk and their price is holding up. Despite reports from the Bank of England that mortgage lending has dropped to a record low, owner-occupiers with significant equity are finding they are relatively attractive to lenders and are being given priority for the funds.

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