Why “Buy To Let Investors” Lost Money In The Boom

“Buy to let property investment” had one of its greatest booms ever in the past few years before the collapse of Northern Rock and the financial crisis. At the peak more than 10% of mortgages being issued were for “buy to let investments”. That was high by historic standards and was considerably higher than the average over the previous decade since the property bust of the 1990s. Yet despite all the enthusiasm, many beginners who piled into property during the boom have lost money and are now struggling. Had they read the beginners guide to buy to let, they probably would be making money now instead of losing it.

The first reason for them losing money was simply that they paid too much for the properties they were buying. Valuations matters. When prices of homes fell in 2008 people who had bought in the preceding year or two suffered an immediate capital loss. The second problem was that many people bought at such extreme valuations that they had little hope of making enough income renting the homes out to cover the costs of servicing their buy to let mortgage loans. What makes matters worse is that there are now very few mortgages for “buy to let” available from banks. So banks have been freely ramping up their charges and the interest rates on mortgages knowing well that clients would struggle to leave and get a better deal elsewhere. Even though official Central Bank interest rates are at their lowest levels ever in history, the rates charged by banks for mortgages remain high. This is especially the case for residential landlords. The danger for many who are struggling to maintain payments now is that many will default on their mortgages as rates begin to rise again when the economy recovers. That could mean thousands of property investors having their properties taken by the banks. Yet all this pain could have been avoided had investors been more selective and followed some basic rules.

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