Buy-to-let ‘unreachable’ for most investors

The buy-to-let market is inaccessible to the average investor and is now only an option for the wealthy, according to the Royal Institute of Chartered Surveyors (RICS).

The Institute blames high interest rates, rapid house price inflation and high levels of rental cover for making this type of investment unavailable to most of the population.

RICS says the average UK property would require a deposit of £65,600 in 2007, assuming an average buy-to-let mortgage requires a 30% deposit.

This compares with just £10,100 in Q1 2002, when most buy-to-let mortgages required an average 8% deposit, according to RICS.

Most buy-to-let mortgages also require high rental coverage of 125%, meaning rental income must be 25% higher than monthly mortgage payments. This has become increasingly difficult to achieve as rental yields fall and interest rates rise.

David Stubbs, senior economist at RICS, says: “It takes more capital than ever to set up a buy-to-let investment. Would-be investors who have missed out on the impressive returns of previous years are now finding the hurdles to property investment are higher than they imagined.

“However, existing landlords should be able to use the equity in their past investment properties to fund the deposit needed for new ones, and this should ensure that demand from the buy-to-let sector does not dry up entirely.”

RICS says interest rates are likely to fall in future and this will help make buy-to-let slightly more attractive, but it is likely to remain out of reach for many potential investors.

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