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Demand for rental property in the UK is continuing to increase, as many individuals are either not prepared to commit to buying a house in the current economic climate, as they see the value dropping over the next few months rather than increasing, or are unable to afford to buy due to the high prices of property and low availability and strict lending criteria of mortgages and home loans.

As a result, many people are looking to rent a property, at least in the short term, until the property and mortgage loan market settle down once more.

As the uncertainty grows ever deeper and the outlook is that the effects of the credit crunch are likely to remain with us for some time to come yet, landlords are seeing a record increase in the demand for their properties.

According to the latest research from the estate agent Your Move, the lettings market has grown by 76 per cent to the end of July this year, from the same time last year.

It is not only the annual rate which has increased, but the demand for rented property has risen on a month by month basis also, with an 18 per cent increase in July over the month of June, despite the fact that summer is traditionally a quiet time, as most people are thinking about holidays at this time rather than moving house.

David Newnes of Your Move said “Demand for rented accommodation has exploded, July’s massive uplift is the biggest this year. The huge boost for demand in rented accommodation is being supported by the large number of properties coming onto the lettings market. A lot of sellers won’t accept depressed prices, instead they’re taking advantage of booming demand for rented accommodation and putting their homes up for rent instead.”

We reported recently on the growing popularity of sale and rent back schemes, due to the financial difficulties being faced by many borrowers in maintaining the repayments on their mortgages and home loans, caused by the effects of the credit crunch.

A sale and rent back scheme allows a struggling home owner to sell their property to a company who will then allow them to rent the property back from the same company under a normal tenancy agreement.  The theory behind this type of scheme is that the home owner gets to clear the debt of his mortgage loan, thus avoiding potential repossession, whilst being able to remain in the family home.

Many housing organisations and charities have already condemned these schemes, calling for regulation to be urgently introduced to a sector which preys on some of the most vulnerable members of society, those who are struggling with debt problems and are accumulating arrears on their mortgage and home loans, often facing the prospect of repossession.

The Council of Mortgage Lenders (CML) has now put its weight behind the argument against sale and rent back schemes, by warning consumers about the products and the low level of security which they offer. The CML, along with Shelter and the Citizens Advice Bureau, have pointed out that such schemes are currently not subject to any form of regulation and therefore home owners who take this option will not have the same level of protection as someone with a mortgage loan.

Michael Coogan of the CML said “The first step for anyone struggling to pay their mortgage is to contact their lender and get advice. There are a range of options your lender can consider to help reduce or reschedule your payments for a period of time while you get back on your feet. Lenders will treat you fairly and use repossession as a last resort. If you take positive action to contact your lender, pay what you can and show up to court and make your case, you are more likely to reach an agreement with your lender that allows you to stay in your home.”

Over the course of the past twelve months, we have seen a drastic reduction in the number of mortgage and home loan deals which are currently available on the market, as banks and building societies have been hit with the effects of the credit crunch, creating liquidity problems in the whole sector due to the lack of available funds on the wholesale market and forcing lenders to withdraw their entire mortgage loan product range and replace it with a set of more expensive loans, with a much tougher lending criteria.

New research, which has just been published by the financial product sourcing website Moneyfacts, has revealed the full extent of the reduction in availability of mortgage loan products.

In August last year there were over 13,000 different mortgage products available, giving potential borrowers a wide range of loans to choose from. In August this year however, this number has dropped to below 4,000, an overall reduction of 70 per cent.

On average, the interest rates being charged on mortgage loans have increased, along with the level of initial fees charged by lenders. At the same time, the level of income multiple used to calculate the maximum loan available has reduced and the maximum loan to value ratio available has dropped to an average of 80 per cent, as opposed to 90 per cent twelve months ago. 100 per cent LTV loans have all but disappeared and there have been large drops in the number of products and lenders offering self certification mortgages and sub prime, or bad credit loans.

An analyst for Moneyfacts said “It is highly unlikely that we will ever get back to the same levels that we were at a year ago. One year ago the financial world changed completely as the credit crunch took hold. Today the world of mortgages is a completely different place. There does not appear to be a single aspect of the mortgage market that has not been unfavourably hit.”

But a spokesman for the Bradford and Bingley disagreed. He said “The lack of liquidity in the market has been a key driver to the reduced number of mortgage products and the changing criteria. The increase in prices has been driven by the significant increase in the cost of funds. So the market should still return once the liquidity returns, however there is no specific date for that. The only guarantee when it begins to come back next year and beyond, is that it will be a gradual recovery, not an instant one.”

There has been a lot of turbulence and uncertainty in the housing and home loan markets over the past twelve months, since the beginning of the credit crunch, with the prospect of falling house prices and a much smaller choice of more restrictive and expensive mortgage and home loan products than at the same time last year.

In addition to this, the situation is being made worse by large increases in the cost of living and high inflation, caused by high food and fuel costs, along with worries over job security and the potential for rising unemployment. As a result of these factors, many people who may have otherwise taken out a home loan and bought a property, are postponing their plans until the market settles down.

According to new research from HSBC, above one in three potential home buyers are not prepared to commit to purchasing at present, due to their belief that both house prices and interest rates on mortgages and home loans are likely to be cheaper in six months time than they currently are.

The research also highlighted that, although there is the feeling amongst borrowers that it is difficult to obtain a loan for a property, around 98 per cent of those considering purchasing would be accepted for a mortgage loan. Of those people interviewed, ten per cent were planning to buy now, whilst 37 per cent were intending to wait until prices fell further and 36 per cent lacked the confidence to purchase, due to the unstable economy and rising costs.

The head of mortgage loans for HSBC said “Many buyers are taking a wait and see attitude, naturally some feel uncomfortable buying a home which may be worth less in six months time. Almost one in four buyers think they might struggle to get a mortgage, however just one in fifty has actually given up on their purchase due to failing to find a suitable loan. Anyone keen to buy a home still has an extensive range of mortgage options.”

Since the beginning of the credit crunch last year, there has been an ever increasing number of people struggling to keep up with their mortgages and home loans and the council of mortgage lenders (CML) predict that there will be a huge increase in arrears on mortgage loans and that repossessions are likely to reach 45,000 by the end of this year, due to the current economic climate.

But it may now soon be possible for local councils to offer mortgage loans to those facing financial difficulties in their local areas. The New Local Government Network (NLGN) is attempting to raise support from local authorities in order that they may lobby the Government to allow local councils to provide home loans and has already obtained signatures on a letter to the Government from a number of local authorities and has a large amount of interest from other councils, who are expected to join the campaign.

This idea is nothing new, as local authorities have previously offered loans for house purchase to local people, from the late fifties, up until the eighties, when a large number of new lenders increased the competition in the mortgage loan market. The Government has already injected £50 billion into the banking system to try and ease the situation and the NLGN are requesting that £2 billion is allocated to local councils to run the scheme, which it feels, would bring a degree of stability to the housing market in their local area.

The scheme has not yet been approved and is still at the proposal and support gathering stage, but the NLGN intends to approach the Government with its plans in the autumn, once Parliament resumes. If they do support the proposals, it is likely that the scheme could be established in a short period of time. James Hulme, from the NLGN said “It would take no time at all to do it. It just needs to be agreed with the Treasury as well as how much they can allocate to it.”