Buy-to-let disaster looming, warns A&L chief

The chief executive of Alliance & Leicester yesterday warned that investors who have ploughed money into specialist mortgages such as buy-to-let deals could be heading for "disaster".

The chief executive of Alliance & Leicester yesterday warned that investors who have ploughed money into specialist mortgages such as buy-to-let deals could be heading for "disaster".

Richard Pym, the chief executive of Britain's eighth biggest mortgage lender, pinpointed self-certification loans - based on customers providing their own proof of income - as a particular danger.

To rely on customers to give accurate details about their income was to "test human honesty to its absolute limits", Mr Pym said. To exaggerate one's financial firepower was particularly risky at the moment, he added, because the UK's rising interest rate environment was making it more difficult for customers to meet their mortgage payments.

While A&L does some self-certification loans - only to customers who provide a payslip detailing their salary - it has no buy-to-let mortgages on its books because stagnating house prices make the investments unattractive, Mr Pym said.

On another matter, Mr Pym said that A&L, along with other UK-quoted companies, would face an "absolute nightmare" from next January when all UK companies must start phasing in new international accounting standards. One rule, relating to the way that balance sheet investments are valued and hedged, was in a "complete and utter muddle" at the moment, he said.

Despite the challenges facing the business, A&L unveiled a 22 per cent increase in pre-tax profits to £320m in the six months to 30 June. A&L said it had boosted the number of mainstream mortgages it had signed up by a hefty 74 per cent. Its shares rose 6p to 835p. However, the bank paid the price for its aggressive lending policy on its profit margins. Its revenues rose just 1.3 per cent to £693m, and the net interest margin, which measures lending profitability, dropped to 1.53 per cent from 1.89 per cent a year earlier.

The bank said it expected margins to recover to "not significantly lower" than the 1.56 per cent it achieved in the first quarter of 2004.