Amateur landlords told to mind the trapdoor

An initiative aimed at encouraging small investors to buy properties to let them out was launched this week with the backing of four lenders, including the Halifax and Woolwich.

The lenders will charge a relatively low margin over normal mortgage rates to investment buyers, their rates to "amateur landlords" at the moment ranging from 6.95 per cent to 7.75 per cent. Borrowers, however, will have to put up between 15 and 40 per cent of the value of the property themselves.

The Association of Residential Letting Agents (Arla), which is behind the Buy-to-Let initiative and which will arrange the lets, estimates that landlords can expect rental returns equivalent to 7 per cent of the property's price. This sum is before tax (rent is taxable) and ignores the cost of the mortgage, but is after maintenance and other ongoing costs.

Arla estimates that landlords should clear 30 to 50 per cent of the charged rent after costs.

The launch of the initiative reflects increasing flexibility among mortgage lenders, and a recovery in the housing market. Arla talks of landlords benefiting from a possible capital appreciation in property prices of 5 per cent a year.

The rates charged by the four lenders - Halifax, Woolwich, Homeloans Direct and Mortgage Express - are up to four percentage points less than the rates sometimes charged on investment properties by lenders.

Arla claims property can be seen as an investment, like shares or unit trusts, and even as a way to fund retirement. Andrew Reeves, of Arla's national council, claims residential property is an attractive alternative. "Self-employed persons wishing to make provision for their pension can consider purchasing one or two properties over, say, 15 years, during which time the investment will be self-financing and after which the rental income will provide a source of retirement funds," says Mr Reeves.

But beware. If the small investor has learned a single lesson over the past 10 years, it is that house prices can go down every bit as fast as they go up.

Amanda Davidson, an independent financial adviser at London-based Holden Meehan IFAs, says: "If you look at the way that equities, which is largely where pension funds are invested, have performed against property, there is absolutely no contest. You'd be much better off in equities."

For example, in the 10 years to December 1989 residential property prices rose by 219 per cent. In the same period, the UK stock market rose 424 per cent. "If you're going to buy a second property, use only surplus money - money that you're not going to weep over if it all goes wrong. It's speculation, and you never speculate with core money," warns Ms Davidson.

Arla suggests people consult an independent financial adviser before going ahead. But anyone considering this should remember that property investment is illiquid - it is not easy to cash in an investment quickly.

Likewise, because mortgages are not considered investments under the Financial Services Act, investors who find themselves badly advised about buying property for retirement provision,would not qualify for the compensation given to buyers of traditional pension plans. Traditional pension products also offer generous tax breaks.

None the less, Arla hopes the scheme will provide a boost to the UK rental market and also help increase job mobility. The Arla Buy-to-Let hotline gives details of participating mortgage lenders. Tel: 01923-896555

Additional reporting by Steve Lodge.

Start your day with The Independent, sign up for daily news emails
Latest stories from i100
Have you tried new the Independent Digital Edition apps?
Independent Dating
and  

By clicking 'Search' you
are agreeing to our
Terms of Use.

iJobs Job Widget
iJobs Money & Business

Guru Careers: Software Developer / C# Developer

£40-50K: Guru Careers: We are seeking an experienced Software / C# Developer w...

Neil Pavier: Management Accountant

£45,000 - £55,000: Neil Pavier: Are you looking for your next opportunity for ...

Sheridan Maine: Commercial Accountant

£45,000 - £55,000: Sheridan Maine: Are you a newly qualified ACA/ACCA/ACMA qua...

Laura Norton: Project Accountant

£50,000 - £60,000: Laura Norton: Are you looking for an opportunity within a w...

Day In a Page

Sun, sex and an anthropological study: One British academic's summer of hell in Magaluf

Sun, sex and an anthropological study

One academic’s summer of hell in Magaluf
From Shakespeare to Rising Damp... to Vicious

Frances de la Tour's 50-year triumph

'Rising Damp' brought De la Tour such recognition that she could be forgiven if she'd never been able to move on. But at 70, she continues to flourish - and to beguile
'That Whitsun, I was late getting away...'

Ian McMillan on the Whitsun Weddings

This weekend is Whitsun, and while the festival may no longer resonate, Larkin's best-loved poem, lives on - along with the train journey at the heart of it
Kathryn Williams explores the works and influences of Sylvia Plath in a new light

Songs from the bell jar

Kathryn Williams explores the works and influences of Sylvia Plath
How one man's day in high heels showed him that Cannes must change its 'no flats' policy

One man's day in high heels

...showed him that Cannes must change its 'flats' policy
Is a quiet crusade to reform executive pay bearing fruit?

Is a quiet crusade to reform executive pay bearing fruit?

Dominic Rossi of Fidelity says his pressure on business to control rewards is working. But why aren’t other fund managers helping?
The King David Hotel gives precious work to Palestinians - unless peace talks are on

King David Hotel: Palestinians not included

The King David is special to Jerusalem. Nick Kochan checked in and discovered it has some special arrangements, too
More people moving from Australia to New Zealand than in the other direction for first time in 24 years

End of the Aussie brain drain

More people moving from Australia to New Zealand than in the other direction for first time in 24 years
Meditation is touted as a cure for mental instability but can it actually be bad for you?

Can meditation be bad for you?

Researching a mass murder, Dr Miguel Farias discovered that, far from bringing inner peace, meditation can leave devotees in pieces
Eurovision 2015: Australians will be cheering on their first-ever entrant this Saturday

Australia's first-ever Eurovision entrant

Australia, a nation of kitsch-worshippers, has always loved the Eurovision Song Contest. Maggie Alderson says it'll fit in fine
Letterman's final Late Show: Laughter, but no tears, as David takes his bow after 33 years

Laughter, but no tears, as Letterman takes his bow after 33 years

Veteran talkshow host steps down to plaudits from four presidents
Ivor Novello Awards 2015: Hozier wins with anti-Catholic song 'Take Me To Church' as John Whittingdale leads praise for Black Sabbath

Hozier's 'blasphemous' song takes Novello award

Singer joins Ed Sheeran and Clean Bandit in celebration of the best in British and Irish music
Tequila gold rush: The spirit has gone from a cheap shot to a multi-billion pound product

Join the tequila gold rush

The spirit has gone from a cheap shot to a multi-billion pound product
12 best statement wallpapers

12 best statement wallpapers

Make an impact and transform a room with a conversation-starting pattern
Paul Scholes column: Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?

Paul Scholes column

Does David De Gea really want to leave Manchester United to fight it out for the No 1 spot at Real Madrid?