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.