The joy of letting ...

Ken Welsby looks at a scheme to encourage buyers to become landlords

Four leading lenders have joined forces to launch a Buy to Let scheme, designed to attract large numbers of private investors into the housing market. The new scheme offers mortgages on investment property at rates much closer to those payable by owner-occupiers - typically 0.5 per cent above standard rates - rather than the commercial terms traditionally charged to landlords.

Those backing Buy to Let are Woolwich, Halifax Mortgage Services, Homeloans Direct and Mortgage Express, part of Lloyds TSB group.

Architects of the scheme are the Association of Residential Letting Agents (Arla), whose members arrange lettings and provide management services.

Robert Orr-Ewing, a member of Arla's ruling council and a partner with Knight Frank, one of the UK's largest letting agents, said rental yields averaged around 7 per cent after running costs and before tax, to which should be added a possible capital appreciation of, say, 5 per cent.

"This looks an attractive alternative to many traditional forms of investment such as high-interest accounts, stocks and shares, unit trusts, Peps and Tessas," he said.

In a typical Buy to Let deal, the investor would contribute 25 per cent of the funds required from his own resources, raising the balance on a mortgage. So if the value of the house rose by 5 per cent, this would amount to growth of 20 per cent on the investment.

Arla members make checks on potential tenants, operate separate client accounts and have professional indemnity insurance. Adrian Coles, director- general of the Council of Mortgage Lenders, which backs the scheme, says the involvement of professional agents makes Buy to Let propositions more creditworthy in several ways: ensuring that properties and rentals are appropriate, finding and vetting tenants and then managing the lettings.

John Schuster, a general manager of Halifax Mortgage Services, said initial inquiries come from a wide range of customers. "Typically they are in their 40s, with above-average earnings, either in well-paid careers or successfully running their own businesses. They are looking for a long- term investment without taking high risks," he said.

Each of the lenders has slightly different terms, and mortgages are available in a wide variety of formats: capital and interest or interest-only with a suitable repayment vehicle such as an endowment or a PEP. Halifax will lend 85 per cent loan to value up to pounds 175,000 at 0.5 per cent above the standard variable rate, currently 6.99 per cent. An income multiple of 3.25 (or three plus one) applies, and this can take into account up to 50 per cent of projected rental income.

All Arla members can advise on local market conditions, offer guidance as to suitable properties. Many will also help investors to assemble a small portfolio to meet their individual circumstances.

Further information: Arla 01923 896555