Enduring love: a buy-to-let affair

As rates rise, has a nation of landlords become dangerously obsessed with property?

How long can the buy-to-let ball keep rolling?

Even last week's fourth quarter-point rise in interest rates in less than a year is unlikely to diminish the appeal of buying a flat or house to rent out.

The amount of cash lent to borrowers for this type of home loan mushroomed last year by nearly a third to reach almost £95bn. The numbers clambering on the buy-to-let ladder, or thinking of doing so, continue to increase, lured by the twin prospect of rental income and growth in the capital value of property.

The runaway success of the market presents a serious obstacle for those struggling to get on the property ladder for the first time, with the demand for buy-to-let investments driving prices ever higher.

Yet this demand - fuelled by social changes such as rising divorce rates and higher numbers of students and immigrants - shows no sign of falling off, thanks in large part to relaxed lending criteria among mortgage providers.

A survey by the market researcher Mintel, published last month, showed that while overall advertising on home loans fell by 10 per cent last year, the spend on buy-to-let mortgage ads rocketed by a third.

The survey also underlined the appeal of buy-to-let to ordinary members of the public rather than professional investors. Our view of bricks and mortar as an investment continues to be rosy, to put it mildly. Of those questioned by Mintel who already owned a second property, nearly three-quarters said they believed that buying bricks and mortar was a "good way of saving for retirement".

Patrick Macvean, 50, from Guildford, is typical of many smaller investors in the market. He has three buy-to-let properties across the UK, in Chatham in Kent, Godalming in Surrey and Market Drayton, Shropshire.

"In retirement, I might have them as an income-spinner," he says. "I also have some shares and a private pension but I am concentrating on property.

"Even if there's a big crash like in the 1990s, property will bounce back. I'm not stretched to the limit and [ensure] I have a buffer."

This optimism is echoed in reader correspondence to the Independent on Sunday Money desk. An alarmingly recurrent theme is the conviction that buying to let will provide a better income in old age than a company or personal pension.

James Cotton of mortgage broker London & Country points to a growing appetite for buy-to-let among younger savers and investors, who just a couple of years ago would never have considered it: "For many who are getting into this, it didn't start out as a deliberate strategy - rather it's almost accidental."

Patrick Connolly of the wealth manager JS&P Towry Law agrees. "Increasingly, two people [who each have a mortgage on their own home] decide to live together in one property, end up seeing both their properties increase in capital value and think, 'I'll keep these'. They also feel, with some degree of reason, that property is a better investment than shares [held in a pension fund]."

Over the past five and 10 years, the growth in residential property values - as measured by the Halifax Property Index - has put growth in the FTSE AllShare index in the shade.

In the past five years, the former has returned 88.4 per cent and the latter 57 per cent, based on figures from the independent financial adviser Bestinvest. Over 10 years, the comparison is 188 per cent against 110 per cent.

Look at the same figures over longer periods, however, and a different story emerges. The returns from shares over 15 and 20 years overshadow those from residential property - respectively, 331 per cent against 201 per cent and 586 per cent against 333 per cent.

"Buy-to-let has become more popular because of the perception that it will always do well," warns Mr Connolly. "The great danger is that individuals become overexposed to one asset class [in their long-term savings plans] - which, of course, has a higher risk."

In a rising market, such concerns can all too easily be set aside. Nevertheless, buy-to-let has much to offer investors who can afford to get into it.

Although the annual "yield" - a measure of the rent as a percentage of the property price - has dropped recently in a buoyant housing market, the growth in capital value of houses and flats more than compensates.

Most buy-to-let mortgages are taken out on an interest-only basis, and for tax purposes, the interest paid on the loan can be deducted from income derived from the property. Maintenance expenses are also tax deductible.

Melanie Bien of mortgage broker Savills Private Finance believes that now is as good a time as any to get into buy-to-let. "Although margins are tightening [for those with variable-rate home loans] as rent rises fail to keep pace with the increase in mortgage payments, [many] landlords are in it for the long run."

But, she adds, if you want to join them, research the market carefully and don't "overstretch yourself".

Boom Or Bust? Giddy heights in a market pushing £100bn

* There are 850,000 buy-to-let mortgages currently held in the UK; in 1999, the number was 73,000.

* The market was worth £94.8bn in 2006, up by 29 per cent on 2005.

* Volumes of buy-to-let mortgages ballooned last year: 2006 saw a near-50 per cent rise in the number of new loans to 330,300.

* Britain now has some 2.9 million privately rented properties. Industry estimates suggest that buy-to-let represents around 11 per cent of housing stock, up from 5 per cent in 2000.

* The market is very young compared with mainstream home loans, taking off only in the mid-1990s.

Source: Mintel