Paragon restarts buy-to-let lending with £200m credit facility

Evidence that the moribund buy-to-let mortgage market is coming back to life has emerged after Paragon - the biggest specialist lender before the credit crunch – began offering new loans to landlords for the first time in two years.

The buy-to-let mortgage specialist has arranged a £200m revolving credit facility to back new mortgages with Australian bank Macquarie and is aiming to lend £1bn a year.

While is this down from the £4bn a year it was lending before the credit crunch, the mortgage market has shrunk since then and in percentage terms will represent the same amount of market share.

Over the last few months the company has been offering trial mortgages to professional landlords, who typically own a dozen properties and form the bulk of its customers, and found strong enough appetite to resume large-scale lending.

Paragon's chief executive, Nigel Terrington, said the £200m facility from Macquarie would now be used to grant new loans and then as the facility was used up, the mortgages would be packaged up and sold off in the securitisation market that dried up in the credit crunch. Paragon has not raised cash this way since June 2007 – just two months before Northern Rock hit the buffers – but intends to return to the market in 2011 after the first of the Macquarie facility is used up.

Its shares were among the biggest risers in the FTSE 100, rising 5.8p to 169p.

The return of Paragon was welcomed by mortgage broker Ray Boulger of John Charcol who said there was pent up demand for such lending from professional landlords, particularly since Lloyds Banking Group pulled back from the market this month.

"The traditional first time buyer is going to be restricted [on getting loans] so the demand for rental properties is going to increase," said Boulger.

Rents nose-dived after peaking in 2008 but have climbed steadily over the last year. The tightening in mortgage lending conditions, typically requiring a larger deposit, has forced many would-be first-time buyers to continue to rent. The financial crisis and property market crash has also resulted in a slump in the number of new homes being built, further squeezing supply. Paragon's move comes in the midst of housing market slowdown, with the British Bankers' Association saying this month that the number of loans approved for buying houses in the UK fell in August to a 16-month low.

The company said the private rental market was "counter-cyclical" to the wider housing market, as rents – and demand for buy-to-let mortgages – typically rise when transactions fall.

Paragon said that the number of borrowers in arrears has continued to fall, and those more than three months behind represented 0.86% of the total order book. It expects full-year profits to be above the market forecast of £58.2m.

This summer, the Association of Residential Lettings Agents, which represents landlords, warned that "the prospect of a severe rental housing shortage is ever more likely".

About a third of the UK's 3.3m privately rented homes have been bought with a buy-to-let mortgage. Buy-to-let lending was the lowest last year since 2001. Paragon is the leading specialist provider, with Lloyds and Nationwide the other main players in the market.