Credit Crunch and Buy-to-Let Landlords

The credit crunch has been at the forefront of peoples' minds for many months now, particularly as it heralds a possible economic recession and even global downturn.

One of the most surprising things about the credit crunch - the absence of liquidity in the financial markets which means that people and businesses can't easily access credit any more - is the speed at which the economy has unravelled.

In a shockingly short space of time banks have been injected with billions of pounds of taxpayers' money in a desperate government bid to encourage the banking system to begin working again, inflation has rocketed due to soaring oil and food production costs, unemployment has started to rise - and the housing market has shuddered to a halt as mortgages are no longer easy to come by.

The housing market has slumped to such an extent over the past year that the average home has now had more than 10% of its value wiped off - and further decreases are expected to follow, with some analysts forecasting price drops of up to 25% over the next three years.

One particular area that has been heavily affected by the impacts of the credit crunch, is the buy-to-let market. This was, until recently, a booming industry with investors seemingly expecting that house prices would only continue to rise and the market would remain buoyant. Many viewed rental properties as a viable alternative to a pension, and an almost-guaranteed nest egg for the future. However, trouble is now looming for buy-to-let investors - as well as plummeting house prices and soaring living costs through inflation, mortgages are far harder for buy-to-let investors to access - particularly at favourable rates (there are only 481 buy-to-let mortgages at the time of writing, when there were previously over 650 a few weeks ago - and landlords may find they have to remain on expensive Standard Variable Rate mortgages when the initial deal expires. This will see profits being eroded - and landlords even being required to fund the difference from their own funds.)

It won't even be possible to easily sell expensive rental properties on, particularly as the stagnant housing market is struggling at the entry end (first time buyers now need 10% deposit on average.)

As a result, the housing market will become increasingly stagnant, and buy-to-let investors are likely to find themselves with heavily, expensively-mortgaged properties that are no longer economically viable to rent out - but, at the same time, it will be incredibly difficult to sell these properties.

Obviously this means that the current economic climate is of great worry to buy-to-let investors, particularly those who invested only recently and planned to provide for their family's financial future through rental income. For these landlords the options seem unfortunately to be limited at this time, and many will surely be keeping their fingers crossed for brighter news sometime soon - for example, for further interest rate cuts, to further boost the initial half a percentage point cut made to the Bank of England Base Rate in October. Until such moves are made to improve conditions, the buy-to-let market will be a very chilly place indeed.