Your money by Lindsey Rogerson

Evidence is now beginning to emerge that some buy-to-let investors have been caught out by the double whammy of falling property prices and rising interest rates.

Last month, the residential sales company Countrywide Property Auctions had four properties on Wallace Street in the G5 postcode at auction. Only two of the flats sold. Of those which sold, one sold at £102,000 - some £27,000 less than a flat of the same size and specification in the same street achieved just last August.

David Sanaman, managing director of fellow house auction specialist Essential Information Group, believes that inexperienced landlords are most likely to be caught out in the current climate. He believes those who bought through "property clubs" without carrying out due diligence are most vulnerable.

It is clear that buy-to-let is now going through a significant adjustment and that landlords sitting on equity gains could face difficulty. Katie Tucker, technical manager for mortgage broker Charcol, explains: "While buy-to-let remortgaging remains at previous strong levels, less than 3% of mortgages taken out in March were people taking the plunge into purchasing. The high cost of mortgages has had an immediate effect, as has the lack of confidence that property value will increase in the next few years. This should change if improving rental yields tip the balance as the rental market soaks up the displaced first-time buyers; however, this could take six months."

According to the Council of Mortgage Lenders, 750,000 mortgages have been taken out in the last two years. It has been well documented that those coming to the end of a fixed rate and looking to remortgage are facing a considerable hike in interest rates. According to Charcol, a best-buy two-year fixed-rate deal in 2006 was 5.25%. Last week it was 6.5%. That amounts to £73 a month to a £100,000, 20-year repayment mortgage.

For landlords facing a hike in interest rates, here are some of the options for easing the pressure below: Private Sector Leasing schemes Landlords looking for certainty could be thrown a lifeline by the growth of private sector leasing (PSL) schemes in Scotland. In return for handing over their property to a council for three, four or five years, landlords get a guaranteed monthly rent - even if their property is empty.

Rents typically match what a landlord would get on the private market, less the fee a management agent would take - typically 10-15%.Where landlords who opt for PSL come out better is that in addition to the guaranteed rent, all legal and final redecoration costs will be paid for by the scheme.

The interest from councils is because of Scotland's 2012 homeless target. At present, councils operate a priority system when it comes to housing the homeless and do not have to offer homes to those who do not fit the strict "priority needs" criteria. These rules are now being wound down, meaning councils will have to find more properties to house the homeless.

Building new council or social housing takes years, which leaves private rental accommodation as the only viable alternative to bed and breakfast. Andrew Morrison, a director at property group Orchard & Shipman plc, which currently operates PSL schemes for four local authorities and is in talks with a further 18 about setting up schemes, explains the mounting interest.

He said: "If a council puts someone in bed and breakfast only half of the cost will be eligible for housing benefit, so the council will have to pay the other half. Our schemes are eligible for 100% of housing benefit, so make much better financial sense for both a council and its council tax payers."

The group currently has 1200 properties under management and contracts to procure another 1300 properties across Edinburgh, West Lothian and Midlothian, and the Scottish Borders. Depending on the outcome of its negotiation with the other local authorities, as many as 10,000 properties could be needed in the next four years. Put the potential demand in context: Scotland currently meets just 7% of its temporary housing need from private rental stock, according to Morrison, compared to an average of 66% of such need being catered for by the private sector in English local authorities.

Raise the Rent It appears it is not just first-time buyers who are sitting back and waiting for prices to drop, in the hope that properties may become more affordable in a few months. Landlords are also anticipating an increase in rental demand for family homes as owners of larger properties sell up and rent temporarily while either looking for another property, or to see if they might get more for their money six months down the line (if the doomsayers have called it right and prices do indeed fall). Both these factors are contributing to an increase in rents according to Jim Parker, chairman of National Landlords Association (NLA) Scotland, who says landlords can capitalise on hesitant buyers.

Parker said: "The market is still buoyant and going strong. All the media scare stories have been fantastic for our market as they are creating a lot of demand. Rents across Scotland have typically gone up by between 5-8% in the last 12 months."

Remortgage Options Landlords looking to remortgage will not only face higher interest rates, as mentioned above, but will have considerably fewer options than 12 months ago. Denise Harvey, mortgage analyst at Moneyfacts, told the Sunday Herald that there were just 607 buy-to- let products on the market last Thursday. On the same day in 2007, there were 2990 mortgages available: a drop of 80%.

Of the 607 products available today, 145 are to max 85%, 248 are to max 80% and 214 are max 75% and under. This means novice landlords who do not have sufficient equity in their property could find themselves in trouble.

Harvey said: "Those coming to the end of their initial deals will find themselves in a difficult position with payments almost certainly increasing, and possibly not being able to remortgage when their deal ends.

"The BTL market has never seen such a lull and prior to the credit crunch people were entering the market with the intention of making money quickly. Looking back this should never have happened. BTL should always been seen as a long-term investment."

To help its members, the NLA this week launched a mortgage service which will pay cash back to landlords when they remortgage. Basically, the NLA is passing the commission it is paid for placing the mortgage back to its members. So for every mortgage placed through NLA Mortgages, a landlord will receive a minimum 0.25% of the loan advance as a cashback upon completion. This would mean someone with a buy-to-let mortgage of £250,000 would earn £625 cashback.

A little something extra from the Treasury One further possible bit of good news, for those facing an unaffordable hike in their buy-to-let mortgage and are forced to sell up, is that changes to capital gains tax rules, which kicked in this month, mean that they now face handing over less of any rise in the value of their property to the government than those selling up just a few weeks ago.

Buy-to-let sellers who were higher rate tax payers, and had owned their property for less than three years, would have had to hand over 40% of any rise in the value of their property if they sold up before April 6. Those selling after this date, however, will pay capital gains tax at just 18%.