UK House Prices -The next bubble waiting to burst ??

Buy-to-let mortgage company tightens rules on new flats

By Jim Pickard,Property Correspondent
Published: December 22 2005 02:00 | Last updated: December 22 2005 02:00

Capital Home Loans, a buy-to-let mortgage company, has tightened its lending criteria on new flats in the latest sign of rising concerns about the market.

The move by the group, a subsidiary of Irish Life and Permanent, follows the decision last week by the Portman, the third largest building society, to stop any buy-to-let lending on new-build apartments.

Capital has changed its requirement for a minimum deposit from 15 to 25 per cent of the building's price. The group, the 10th largest buy-to-let lender, said this reflected the confusion over values in the market.

Developers offer a variety of incentives such as free carpets and curtains, paying stamp duty on properties and giving cashbacks or "guaranteed rental periods".

This means that the real price paid for a flat is often way below the nominal price, which is the one that appears on a contract.

Many investors have used cashback deals as their deposits and thousands have been encouraged by property investment clubs to build up large property portfolios with as little outlay as possible.

"These incentives can make a big difference to the real price," said Trevor Child, senior manager of marketing at Capital. "We need to be conservative with our lending processes."

Mr Child indicated that the group was following Portman's lead. "With other lenders tightening up their criteria, it is very sensible to pull back yourself or you become over-exposed," he said. "Everyone is looking at their lending criteria now."

Capital is also limiting its exposure to any single development to less than 25 per cent of the block.

Surveyors have complained that it is increasingly difficult for them to give accurate valuations on new-build flats because their only comparisons are on similar apartments - yet it is hard to get accurate price information because of the many discounts on offer.

The concerns come amid a 5.7 per cent fall in the price of new flats in the year to September despite a rise in the overall housing market.

The proportion of flats has grown from about 20 per cent of newly-built properties to more than 40 per cent under pressure from the government to build on brownfield land.

Alastair Stewart, a construction analyst at Dresdner Kleinwort Wasserstein, has warned that there is now an over-supply of flats that could cause problems for housebuilders if the buy-to-let market slowed.

Mr Stewart said the move by Capital to tighten its lending criteria spoke volumes about the market.

"I would say this is further evidence that lenders are becoming increasingly nervous about valuations in this sector of the market," he said. "Some investor clubs will fall apart unless their members can buy properties with minimum equity [deposits]."