BRITAIN’S army of buy-to-let landlords are experiencing a repayment shock more severe than the one faced by other borrowers, as lenders raise rates in response to growing evidence of arrears in the sector.

Thousands will be fighting to keep their investments, experts said, after a disastrous week in which Bradford & Bingley, Britain’s largest buy-to-let lender, warned profits would fall 50%, fuelled by a sharp rise in bad debts. The number of borrowers missing three or more payments jumped by 36% between the end of December and April.

Although the Bank of England left rates at 5% last week, Mortgage Express, the lending arm of B&B, announced on Friday that it was increasing buy-to-let mortgage rates by up to 0.55 percentage points on three and five-year fixed-rate loans.

BM Solutions, which issued the most buy-to-let mortgages last year, has cut its product range from 20 to seven since February.

Capital Home Loans, another lender popular with brokers, quit the market this year.

It is feared that strife in the buy-to-let market could accelerate the housing market down-turn after Halifax said house prices fell by 2.4% last month.

Even “good” landlords with equity of 25%, multiple properties and no history of arrears are having to pay the standard variable rate after changes to criteria froze them out of the remortgage market.

Lenders are now demanding that rental income covers up to 130% of repayments, compared with 100% at the start of the year. While rents are rising, they have not gone up enough to cover the higher repayments Suppose a landlord took out an interest-only mortgage of £100,000 at fixed rate of 5.29% two years ago, giving monthly payments of £440. They are receiving £475 in rent, which more than covered the mortgage payments. At the end of the term, they could either remortgage or go on to their lender’s standard variable rate at 7.2%.

A best-buy deal with an interest rate of 6.14% will give monthly repayments of £511. However, the lender requires your rent to cover 125% of your mortgage, so it would need to be £640 a month - an increase of 35%, which is likely to be too much for most tenants.

Alternatively, the borrower could pay an extra £234 to stay with their existing lender - a bigger payment shock that for ordinary residential mortgages.

John Postlethwaite at Punter Southall Financial Management said: “Private landlords are faced with a stark choice. Increase the rent, pay more or sell the property. The worry is if large numbers of landlords are trying to offload properties at the same time, prices will fall even further and faster than they are now.”

Simon Tyler, of Chase de Vere Mortgage Management, said: “Some deals take other personal income into consideration if the rent is short. Standard Life Bank and C&G offer this service through brokers.”

We offer some tips on ensuring your investment stays afloat.

Offset your repayments

Landlords have to pay tax on rental income, but can cut this by claiming a deduction for interest repayments. Be warned, though, you cannot claim any repayments towards the capital amount, only the interest.

Claim all expenses

Costs such as letting agents’ fees and painting the front of the property are 100% tax deductible so if you spend £500 on painting and decorating and agent fees of £1,000 in a year, your taxable income would be reduced by £1,500.

The same applies to water rates, council tax, gas and electricity (unless paid by the tenant), repairs, decoration and replacing existing fittings and insurance.

Turn it into a holiday let

You are able to claim up to £50,000 tax relief on any spending on renovations to improve a holiday letting. This does not apply to buy-to-let.

Use furnishings finance

Some firms are providing finance to investors who committed to buying off-plan but are now short of money to furnish the property because mortgage costs have risen.

Style Counsel Interiors will give landlords a year to find the money for the furniture, or arrange staged payments. If you can repay the loan within a year you will pay 0% interest. A rate of 9.9% applies for the next 36 months. RAVIN GINIGE, 58, a scientist who lives in Chelmsford, Essex, has two buy-to-let investment properties in addition to his own home and a property in Sri Lanka.

He has more than 20% equity in his properties, but is unable to remortgage one of them.

The property, valued at £575,000, was originally mortgaged with Mortgage Express, owned by Bradford & Bingley, at 5.89%.

The mortgage is £315,000, meaning he has equity of 45%. With monthly rental at £1,550 and repayments now close to 7%, the income no longer satisfies most buy-to-let lenders’ criteria.

Ginige said: ‘I think it is completely unfair that my lender has changed its criteria in the past two years - this has caused a huge jump in my monthly repayments.’

THE BEST DEALS

Lender | Rate | Deal | Fee | Deposit

Chelsea | 6.29% | 2-yr fix | 2.5% | 30%

BM Solutions | 6.34% | 3-yr fix | 1.5% | 25%

Bank of Scotland | 6.39% | 5-yr fix | 2% | 25%

Kent Reliance | 6.85% | 10-yr fix | £935 | 40%

Principality | 6.19% | 2-yr tracker | 2.5% | 40%

Source: L&C Mortgages 0800 373300