Falling house prices drive up BTL yields

Gross yields rose on all types of buy-to-let property in the third quarter, apart from semi-commercial – for example, flats over shops. Yields on Houses in Multiple Occupation (HMOs) jumped from 9.2% to 11.1%.

According to the latest Mortgages for Business buy-to-let index, the driving factors behind the increase were a combination of falling property prices and high tenant demand.

David Whittaker, managing director of Mortgages for Business, said: “The owner-occupier market is sinking deeper into the mire and is dragging property prices down with it.

“It’s great news for buy-to-let investors, who are able to snap up cheaper property, usually at a higher LTV because lenders are understandably willing to advance more when property prices are lower.

“It’s a fairly simple equation: suppressed property prices, plus strong demand for rented accommodation, equals higher yields for landlords.  
 
“Investors are being canny and targeting areas where house prices are particularly squeezed. Anywhere outside the South-East is a particularly rich seam at the moment.”

According to the index, yields on ‘vanilla’ buy-to-let increased from 6.1% to 6.7% over the quarter, thanks largely to the average property value of vanilla investments falling by 3% between Q2 and Q3 to £210,197.

This helped push up the average LTV from 64% to 68%, with lenders more willing to grant higher LTV deals thanks to lower property prices.
 
Similarly, the jump in yields for HMOs was triggered by a sharp increase in refinancing of cheaper property. The average property value in HMO deals fell 41% compared to last quarter as more investors refinanced on properties under £200,000, with the launch of Keystone buy-to-let range offering investors a wider range of financing options on cheaper property.
 
Yields on Multi-Unit Freehold Block property rose for similar reasons. Gross yields increased from 7.5% to 8.8% between Q3 and Q4 as average property values in deals in this sector decreased by 33% from £442,223 to £297,938.
 
Bucking the market trends was semi-commercial property, where gross yields fell from 7.4% to 7.1% between Q2 and Q3, despite the average property value falling by 26% from £1,054,913 to £779,761. Average loan sizes remained relatively flat, with lenders like RBS Group asking investors to refinance elsewhere as they look to reduce their exposure to this type of property.
 
The number of lenders operating in buy-to-let remained at 25, while the number of products increased slightly to 465 from 456 in Q2.