It has been an uncomfortable fortnight for Britain's army of landlords. House prices are falling faster than at any point in the past 50 years and experienced lenders have been backing out of the market.

Some commentators have been declaring the death of buy-to-let and experts agree that there is little to be gained from entering the market in the current economic climate.

It has not been all bad news. Rental demand is expected to continue to grow as first-time buyers delay the purchase of their first home. There are 1.6 million 20 to 39-year-olds who are renting because they cannot afford to get on the property ladder, according to Hometrack, the property data company. A 20 per cent fall in house prices would still open the market up to only 600,000 young buyers.

Richard Donnell, of Hometrack, says: “Rental demand is fuelled by young people in their twenties and thirties who cannot afford to buy. Even a sharp fall in house prices won't bring that many people into the market, thus fuelling rental demand for the next 18 months at least.”

But the picture is far from clear. While demand for rental accomodation is high in some areas - such as Slough, Gloucester and Tonbridge, Kent - in others demand has collapsed because of oversupply. A boom in the construction of new-build blocks has forced down the value of flats and had a significant impact on rents in many city centres. In one case, a flat in Kelso Heights, Leeds, was bought in 2006 for £237,999 and sold this year for £71,000.

Mr Donnell says: “Between 1995 and 2002 buy-to-let was a no-brainer. But now it's not so simple.”

During the boom years landlords often took mortgages with the highest loan-to-value ratios because it was the most cost-efficient way to borrow money. A number of lenders allowed landlords to borrow up to 85 per cent of the value of their property. Now few will lend more than 75 per cent.

Jonathan Cornell, of Hamptons International, the mortgage broker, says: “Worryingly, landlords who purchased a buy-to-let in the past few years will have got the highest possible loan-to-value ratio. Now they could find that they are unable to remortgage to a new deal.”

Falling house prices also mean that the loan-to-value ratios on the deals they already have are increasing. Even those who borrowed 75 per cent might find that the ratio has increased because of falling house prices. Lee Grandin, of Landlord Mortgages, a specialist buy-to-let lender, says: “There will be a substantial number of bankruptcies and a rise in repossessions in the small sector of the market dominated by landlords who entered at the height of the market, over-leveraged themselves and did not do their homework.”

Thousands of borrowers will soon be coming to the end of two, three and five-year fixed-rate mortgage deals taken out between 2003 and 2006. But they now face a mortgage shock.

In October 2005 Bank of Ireland offered a typical three-year fixed-rate deal with a rate of 5.15 per cent on up to 85 per cent of a property's value. At the end of the fixed-rate period, borrowers who are unable to remortgage will be forced on to a standard variable rate of 6.25 per cent. For example, a landlord borrowing £150,000 and paying back interest only would have monthly repayments of £643 at 5.15 per cent. When the deal ends this year the repayments will jump to £781 on the bank's standard variable rate.

In August last year, a month before the credit crunch began, there were 87 lenders offering 3,662 buy-to-let deals. Since then banks and building societies have deserted the market. Some of the biggest buy-to-let names, including Paragon Mortgages and Capital Home Loans, have stopped lending completely.

This decline has accelerated in the past two weeks with the nationalisation of the biggest player in the market, Bradford & Bingley. When its specialist mortgage arm, Mortgage Express, closed to new business, a big hole was left in the buy-to-let market. Other lenders panicked, either dropping out of the market, for fear of being overwhelmed by demand, or raising rates and scrapping deals.

The number of buy-to-let deals for borrowers with small deposits continued to fall this week, despite the Government's attempts to kick-start the market. Bristol & West and Bank of Ireland became the latest lenders to scrap all deals for landlords with less than 25 per cent equity in their property.

There are now 62 lenders in the market, offering only 402 buy-to-let deals, according to Moneyfacts.co.uk, the financial website, and only three of those lenders are willing to offer loans of up to 85 per cent.

Mr Grandin says: “It is now almost impossible to find an 85 per cent deal. Investors who entered the market in the past three years or those who have taken on additional borrowing against an individual property will struggle to make a positive return on their investment. It may take years for that kind of landlord to become profitable again.”

Landlords with a fixed rate that expires next year or in 2010 have time to prepare for a potential spike in mortgage rates when their deals end. David Hollingworth, of L&C Mortgages, the broker, says: “Landlords should build up a fund that they can put towards reducing the mortgage, if necessary.”

Experts believe that mortgage rates could begin to fall as the Bank of England base rate edge lower, but some fear that the market will remain restricted for the next year at least. Mr Hollingworth says: “You need the supply of mortgages to improve and the housing market to stabilise before lenders will start offering deals with loan-to-value ratios of more than 75 per cent.”

However, Malcolm Harrison, of the Association of Residential Letting Agents, believes that fears that landlords will rush to sell their properties are likely to prove unfounded. He says: “A typical buy-to-let landlord is in his forties, holds a couple of properties and is thinking about his pension fund.

“Landlords who have good-value properties in the right condition and in the right letting market should expect to achieve rental growth of about 3 per cent over the next three years.”

CASE STUDY: THE LONG-TERM GAINS WILL BE WORTH SOME SHORT-TERM PAIN

COLIN REVELL, left, made his first buy-to-let investment in 1987. He bought a five-bedroom house in

Selly Oak, a suburb of Birmingham, for £53,000, living in one of the rooms and renting out the other four to tenants.

The 43-year-old has since extended the house, adding a loft conversion and a ground-floor extension, creating a seven-bedroom property that was valued at about £250,000 in 2006.

Over the past 20 years Mr Revell has invested in more buy-to-let properties in the Birmingham area. He has a number of other homes in Selly Oak, which he rents out to students, and in Harborne and Edgbaston, which are rented out to older professionals.

In 2002 he bought six new-build flats in a prestigious canal-side development in central Birmingham for about £250,000 each. In the first year he charged rent of up to £1,200 a month. But rents and prices in the area have fallen and Mr Revell now collects about £900 a month.

“It was simply a case of oversupply,” he says. “I bought these flats as a long-term investment.

The maintenance costs were low and I thought that I could expect the value to rise to £350,000 by 2012. Instead, I will be lucky if the price is £250,000.”

However, like many buy-to-let investors, Mr Revell is in it for the

long term and believes that the flats will provide a return on his investment eventually. He adds: “I bought these flats with an eye on my retirement. A normal pension does not mature in five years.”

Mr Revell's several mortgages are on fixed rates for two and five years. The deals come to an end between next year and 2011, by which time he hopes that lending conditions will have improved.

MORTGAGE WATCH: LENDERS SLOW TO REDUCE VARIABLE RATES

ONLY a handful of lenders confirmed that they were passing on the Bank of England's half-point cut in the base rate this week. Homeowners on variable-rate deals with the Co-operative and Bradford & Bingley, the nationalised lender, will benefit in full.

However, Nationwide, the UK's largest building society, disappointed borrowers by cutting its standard variable rate (SVR) by three tenths of a percentage point to 6.19 per cent. Abbey, meanwhile, reduced its SVR by a measly 0.15 points to

6.94 per cent and HSBC announced that it was holding its variable rate at 6.25 per cent

Only four of 85 building societies have announced cuts to their variable rates after the Bank of England's half-point cut in the base rate last week. Further reductions in the base rate are expected over the next few months, with economists predicting that it could fall to 3.5 per cent by the middle of next year. If this is the case, there could be another half-point cut before Christmas.

This would be good news for homeowners already on tracker mortgages pegged to the base rate. Those hoping to remortgage to a tracker loan in the coming months are being urged to secure a deal now because lenders are starting to increase rates.

Abbey was the first to change its tracker rates after the Bank of England's move. It cancelled out any benefit to new borrowers by raising its most competitive two-year deal from 0.89 points above base to

1.39 points above base. Chelthenham & Gloucester (C&G), owned by Lloyds TSB, and Woolwich, owned by Barclays, the fifth and sixth-biggest lenders respectively, also increased their trackers by up to half a percentage point.

Lenders have blamed the increases on paralysis on the interbank money market. Melanie Bien, of Savills Private Finance, the mortgage broker, says: “'The pricing of tracker mortgages is driven largely by the three-month Libor, not the base rate, which is why lenders have been raising new tracker rates in recent days. How quickly Libor adjusts will be key to how quickly we see more competitive trackers.”

Libor rates may still be stubbornly high, but swap rates, the money markets that banks use to fund fixed-rate deals, have been falling steadily over the past two weeks. Royal Bank of Scotland responded by announcing cuts to its fixed-rate deals this week.

The best two-year fix is from Market Harborough Building Society, with a rate of 5.49 per cent on loans up to 75 per cent of a property's value. It has a fee of £595.

The best tracker is from C&G, with a two-year deal pegged at

0.49 points above the base rate. It is available with a loan-to-value ratio of up to 75 per cent and has an arrangement fee of 2.5 per cent.