THIS was the year that buy-to-let started to crumble as rising interest rates and falling house-price growth meant the sums simply didn’t add up for many new investors.

Hundreds of thousands of existing landlords could also come unstuck in the new year as they face their version of the “payment shock” that has hit ordinary borrowers.

With buy-to-let lenders getting tough, many investors could find themselves having to demand more money from tenants – or pay thousands off their loans - simply to be able to remortgage.

When house prices were rising strongly, many landlords were prepared to accept higher mortgage costs, but growth has slowed sharply this year. In January, house prices were rising at an annual rate of 9.9%, according to Halifax. By November, that rate had decelerated to 6.3% and the lender thinks there will be no growth next year.

Capital Economics, a consultancy, last week downgraded its forecast from 3% falls in 2008 and 2009, to a drop of 5% and then 8%, wiping out gains of the past 18 months.

The latest buy-to-let survey from the Royal Institution of Chartered Surveyors found that the percentage of landlords selling their properties as a result of the downturn was at the highest level since January 2005.

Andy Woolley at the Countrywide estate agency in Portsmouth, said: “We are noticing a growing number of landlords are opting to sell their property rather than relet.”

The situation could get worse next year when about 250,000 buy-to-let loans will be up for renewal. Some landlords may struggle to get a new mortgage because of tighter lending criteria and rising interest rates.

Traditionally, investors had to put down deposits of at least 20% and receive enough rent each month to cover 125% of the mortgage payment. The aim of this surplus was to provide a financial cushion in case the landlord had a period with no tenant.

Before the credit crisis, however, many lenders had relaxed their criteria: some only required a 10% deposit. Rental calculations were also tweaked so in some instances the rent only needed to cover repayments.

In December 2005, for example, Northern Rock had a two-year fix at 4.99%, with a 1.5% fee. The bank required the expected rental income to equal a rate of 1 percentage point above Bank rate at the time – or 5.5%. Someone wanting to borrow £200,000 on an interest-only basis would therefore have needed a monthly rental income of at least £917 and their mortgage payments would have been £832 a month.

Let’s assume the landlord received rent of £920 a month in the first year and it rose by 5% to £966 this year. Next year, assuming another 5% increase, he will get £1,014 a month. However, research from Savills Private Finance, a broker, reckons this is not enough for him to qualify for the best two-year fix currently available for remortgages.

BM Solutions is offering a two-year deal fixed at 5.59%. Those remortgaging receive a refunded valuation, plus £300 cashback, although there is a 1.75% arrangement fee. BMS requires the rental income to be at least 125%. This means the borrower would need to earn at least £1,165 a month in rent – £151 more than expected.

In order to qualify for this deal he would either have to put up the rent further or plough more equity into the property to bring the size of the mortgage down. For the sums to work, the mortgage would have to be reduced from £200,000 to £175,000.

Melanie Bien at Savills Private Finance, a broker, said: “The liquidity crisis is having a significant impact on the buy-to-let-market with lenders tightening their criteria, increasing rental cover, reducing maximum loans and imposing minimum-income requirements. Landlords could find it harder than ever to make the sums add up.”

For the time being at least, brokers say most landlords will be able to find an alternative mortgage when their current deal expires, although they may not be able to get the most competitive rates. The number of buy-to-let products has fallen about 50% since July, according to data firm Moneyfacts.

Those most likely to struggle to remortgage are investors who have bought new-build flats in the past couple of years and landlords who gear up to release as much equity as possible from existing properties to add to their portfolio.

New-build flats have fallen by 3% in the past year, according to Ludlow Thompson, an estate agent, but values of units in some city-centre developments have plummeted by as much as 35%.

David Hollingworth at L&C Mortgages, a broker, said: “Most landlords will have seen the value of their properties increase over the last few years, so even though many lenders are scaling back on the amount they will lend, the majority of borrowers will be unaffected. However, those who have been gearing up to fund the purchase of new properties could find it harder to get a new mortgage.”

Even though many lenders have tightened criteria in recent months, some are still quite generous. Mortgage Express, The Mortgage Business and Mortgages Plc, for example, still lend up to 90% of a property’s value. TMB and Clydesdale Bank will consider other forms of income if the rent you get isn’t sufficient to cover your mortgage payments.

However, there is a trade-off - the rate you have to pay will not be the most competitive one. Mortgage Express might lend up to 90%, but its cheapest two-year fix for loans of this size is 6.09% and there is a 2% arrangement fee.

Mortgage-arrangement fees are also on the up, and an increasing number of buy-to-let providers now charge a percentage of the loan size which can be as much as 3% – £6,000 on a £200,000 mortgage.

Arrangement fees can be added to the mortgage, but anyone who does this reduces the equity they have in their property. With many lenders now advancing a maximum of 85% of a property’s value, adding a 3% fee to the loan in effect pushes the value of the mortgage up to 88%.

When prices are rising, this isn’t as much of a problem, because by the time you come to remortgage the outstanding debt will represent a smaller proportion of the property’s value. Lee Grandin at Landlord Mortgages, a broker, warns that if prices fall, or are stagnant, as many analysts expect them to be over the next few years, landlords may find that they cannot raise a large enough loan next time they need to remortgage.

Diana Wright’s Question of Money column will return on January 6.