Why buy-to-let landlords shouldn't panic - yet

orecasters are now predicting squally weather for buy-to-let investors, pointing to rising interest rates, the highest cost of living for a decade, and even a possible property crash on the horizon.

Perhaps surprisingly, the reaction of most landlords is not to sell up and put the money under the mattress, but to hunker down and wait for better weather, according to data from specialist mortgage lenders.

Professor Michael Ball of the University of Reading Business School, who researched the buy-to-let market in depth for an Association of Residential Letting Agents report last year, believes that the property boom has delivered landlords a cushion of equity that gives them the confidence to hang on rather than sell up. "My research showed that a lot of buy-to-let investors have a lot of their own equity in their properties, and are pretty financially secure," he says.

In any event, most are confident that prices will slow down rather than slump. "Prices can't rise for ever, of course, but I would be very surprised if they went down. There is very strong demand and tight supply," says Professor Ball.

Even rising interest rates are not all bad for investors, he points out: "The silver lining is that, as interest rates rise, this discourages tenants from buying their own place."

Demand has been boosted over the last few years by an influx of workers from mainland Europe who are used to renting and, in any event, see themselves as here temporarily. The supply side has been constrained by the UK planning system. As a result, rents have risen substantially over the last few months and voids are shorter, with the average tenancy now lasting for 17 months.

"There are very strong levels of rental demand, and landlords are able to price rents accordingly," says Nigel Terrington of the specialist buy-to-let mortgage-lender Paragon.

Investors are generally cautious and usually borrow on fixed-rate mortgages, even though they cost slightly more than variable- rate ones. "About 70 per cent of buy-to-let mortgages are fixed-rate, and they have been anticipating the rise in interest rates for some time," says Terrington.

Knowing that your mortgage rate will not rise, at least for a period, gives landlords confidence to stay put rather than incur the substantial costs of selling. "If landlords believe that prices will drop by even 20 per cent, they will sit on their hands until prices have stabilised, then take advantage of the lower prices to buy," says Terrington.

Paragon's records show that buy-to-let investors have weathered previous squalls. In the 2004/5 blip, the rate at which mortgages were redeemed, which indicates how many landlords are selling, actually fell, indicating they were neither selling up, nor refinancing for more purchases.

"Landlords will not sell, they are adamant about that. They are buying for the long term, and they don't have to move in the way that owner-occupiers must occasionally," Terrington explains.

Gavin Davidson, of the Property Investment Market, a "stock market" for shares in properties, believes that there will be some "distress sales", however. "A lot of buy-to-let investors have built up portfolios, so they feel fairly secure, but some individuals who bought recently with high gearing will sell," he says.

Davidson believes that a slow-down, or even a modest correction in the market, would actually be beneficial by making the market more stable and predictable. "Uncertainty in the market is not good. In the south of the country, the market has been quite hot, so anything that takes a bit of the steam out of it is good," he says.

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