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With rents on the rise mortgage lenders see landlords as a better bet than first-time buyers. Patrick Collinson asks if a worrying bubble is being created in a resurgent market

Comment: Buy-to-let in desperate need of reform

Britain's lenders are turning their backs on first-time buyers and other traditional borrowers, and granting mortgages to landlords instead amid signs of a new buy-to-let bubble.

Northern Rock this week joined an expanding list of lenders, including a Lloyds Banking Group subsidiary, pushing out new buy-to-let loans on better terms, while Santander is also preparing to enter the market.

In an extraordinary admission, Nationwide ? one of the biggest mortgage lenders ? says it would rather give mortgages to landlords than first-time buyers. Matthew Wyles, the society's "distribution director", told an industry debate hosted by HSBC: "As a lender, we would rather lend 75% LTV [loan-to-value] on a buy-to-let mortgage to an experienced buy-to-let investor, than to a first-time buyer at 95% LTV."

Figures from the data provider Moneyfacts show that the number of buy-to-let loans available to landlords has doubled over the past year, with the pace of new launches accelerating in recent weeks. According to its research, there are 434 different buy-to-let loan offers currently available, compared with 215 at the start of 2010 and 330 just a month ago.

Behind the dash back into buy-to-let is the rise in rents in a market fuelled by frustrated first-time buyers who can't find the finance for a home of their own.

This week, LSL Property Services, Britain's biggest network of letting agents, said that rents were "powering ahead" in many parts of the country, especially London.

David Newnes of LSL, which owns Your Move and Reeds Rains, says: "Landlords are seeing demand for their properties go from strength to strength. First-time buyers simply can't afford the average �25,000 deposit required and, as a result, most are remaining in rented accommodation for nearly a decade.

"The growing demand continues to outstrip supply, and this is pushing rents upwards beyond the rate of inflation, and well above wage rises."

Big lenders are also easing constraints that were put on borrowing during the credit crunch. According to the Council of Mortgage Lenders (CML), �3bn worth of loans were granted to landlords in the last quarter of 2010 ? substantially below the peak levels of 2006 and 2007, but up 42% over the year.

The CML added that the average loan ceiling for investors ? the maximum amount an individual landlord can borrow from a single lender ? has risen from �2m to �2.5m over the past year. Separately, maximum LTVs on buy-to-let mortgages have edged up in recent months towards 85%.

State-owned Northern Rock, which this week cut rates on buy-to-let loans by 0.4%, will offer landlords mortgages on up to 10 properties, worth up to �3m. Landlords need prove an income of only �25,000 a year to start qualifying for buy-to-let loans. Meanwhile BM Solutions, a division of Lloyds, is promising a "one-minute mortgage" deal for landlords.

Some of the specialist lenders that withdrew from the market during the credit crunch have now reopened for business. A name synonymous with the pre-2008 boom, Mortgage Trust, part of the Paragon Group, this week returned to the market three years after closing its doors. It promises cheap and simple mortgages for smaller landlords, starting at 3.99%, and what's called "fast-track" underwriting through mortgage intermediaries.

Fast-track underwriting has a controversial recent history. In July last year, the Financial Services Authority (FSA) published proposals to ban fast-track and "self-cert" mortgages, effectively granted without stringent checks on an applicant's income and ability to repay. It also expressed concerns about interest-only mortgages.

But unlike conventional residential mortgages, buy-to-let deals are not subject to regulation by the FSA. Interest-only lending to landlords is commonplace, and lenders are free to offer fast-tracking. In a note this week hailing the return of Mortgage Trust, Legal & General's Mortgage Club told landlords that the loans would be subject only to "fast-track, credit score-based underwriting".

The revival in buy-to-let has angered critics who argue that lending to landlords has prevented millions from buying a home. Matt Griffiths of the campaign group PricedOut says: "For anyone concerned about maintaining widespread home ownership, this is deeply worrying. Many young people are now being effectively disenfranchised from the property-owning democracy by buy-to-let investors. Buy-to-let benefits from both cheaper mortgage finance (via the use of interest-only mortgages) and tax breaks on interest payments, which means they can easily outgun any first-time buyer for the purchase of lower-end properties.

"This has been exacerbated by the growing tendency of first-time buyers to use repayment mortgages (over 90% did in December 2009), and the higher deposit barrier required by cautious mainstream lenders. This is deeply ironic, as buy-to-let activity has been much riskier and more volatile than lending for normal homebuying."

Will the re-emergence of buy-to-let be a warning light to regulators and the Bank of England? Eight of the top nine UK buy-to-let lenders in 2007 have since been either rescued by the taxpayer, closed to further business or forced to undergo substantial retrenchment. PricedOut argues that, in the run-up to the financial crisis, buy-to-let disproportionally utilised the new financing opportunities created by investment bank securitisation deals, and was dominated by short-term and speculative behaviour. "It was the main conduit through which excessive credit availability has been transmitted and amplified into the UK housing market," says Griffiths.

PricedOut wants buy-to-let to be regulated, but recent government intervention has favoured landlords. In the last budget, the chancellor unveiled a �560m tax giveaway on buy-to-let stamp duty bills.

Meanwhile tenants face an uphill struggle to save the large deposits needed to obtain a mortgage, as landlords push through rent rises much in excess of wage rises. LSL predicts that, at the current rate of increase, average monthly rents paid by tenants across Britain will hit �715 this time next year, and top �1,050 in London.

Property investment firm Assetz, one of the cheerleaders of the buy-to-let boom, said business had doubled over the past year and that landlords are fast replacing first-time buyers. Its chief executive, Stuart Law, told the industry magazine Mortgage Strategy this week that: "Lenders are making no secret of the fact that they would rather allocate the limited funds they do have to the lower-risk option of buy-to-let loans, with deposits of 25-40%, than first-time buyers loans with 90% LTVs . As a result, the buy-to-let sector is recovering at a remarkable rate."