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Banks Set for Sharp Increase in Mortgages to Landlords

BANKS in the buy-to-let market are looking forward to a sharp rise in demand for loans resulting from an expected 40 per cent surge in the private rented sector.

The Centre for Economics and Business Research believes that Britain's private rented sector will surge by a million homes to 3.5 million over the next eight years.

A rise in immigration, changes to pension legislation and an increase in the number of single-person households all are expected to fuel the increase.

Britain's biggest lenders say that this surge in demand would underpin the buy-to-let market, which until recently the City has considered a risky area of lending.

Alliance & Leicester, the former building society, said this year that it intended to return to the market after staying out for a couple of years. A spokesman said: "There were a lot of people in the buy-to-let market who did not understand the risk they were taking on."

The spokesman said that the market had now reached maturity, which was why A&L was considering a return.

Also seen as a ground for optimism is the change in rules governing self-invested personal pensions that from April will allow landlords to put residential property into their pension funds.

Nigel Terrington, chief executive of Paragon, the buy-to-let specialist, said that it was preparing a new product aimed at landlords, hoping to take advantage of the pension regulation changes. "The buy-to-let market has been widely misunderstood by investors and analysts," he said.

Arrears and repossession rates were lower than in conventional mortgage lending and yields for landlords remained high, Mr Terrrington said.

The Council of Mortgage Lenders (CML), which follows the mortgage market, has put the amount of money lent in the buy-to-let market in the first half of the year at nearly £10 billion.

The biggest lenders are HBOS, through Birmingham Midshires and Bank of Scotland, and Bradford & Bingley, through Mortgage Express. The CML said that the loans advanced were marginally higher than in the second half of 2004.

Andrew Heywood, senior policy adviser, said: "Our half-yearly figures suggest the market is in robust shape, and the recent cut in interest rates by the Bank of England will serve to buoy up the sector in the coming months."

Caroline Merrell, Banking Correspondent