Mortgages for Business’ latest Complex Buy-to-let Index has revealed that HMOs produced average yields of 8.9% in 2017, the highest of all buy-to-let property types. 

This is the first time that yields for this type of property have dipped below 9% since the index was launched in 2011.

“The attractiveness of HMOs as a buy-to-let investment has increased in recent years not only because of the higher yields on offer but because serious investors are keener to diversify their portfolios,” said Jeni Browne, sales director at Mortgages for Business.

“With more landlords vying for these properties, prices have been pushed up more quickly than the rents which, I would suggest, is one of the main reasons we are seeing their yields drop, although, I suspect that the granting of fewer new HMO licences is also having an impact.”

Multi-units, such as blocks of flats, came a close second in 2017 generating yields of 8.1% compared to 8.3% the year before. By comparison, ‘vanilla’ properties produced lower yet more consistent yields averaging 5.6% in 2017.

The average value of a vanilla buy-to-let property in 2017 was £305,283, a 19% decrease on the average in 2016 (£375,409). Mortgages for Business said these results suggest that that landlords are seeking lower value properties and, anecdotally, the firm hears that they have been looking further north for their acquisitions where prices are cheaper. The benefits of this strategy include less stamp duty, future capital growth, and scope for rental increases which thus allow for slightly higher yields, Browne said.

“Savvy landlords like to have a good mix of properties,” she added. “They like the consistency of vanilla buy-to-lets and the higher returns of more complex property types. Although lower than previously, 8.9% is still an excellent return for HMOs, not only when compared to vanilla buy-to-lets but also other, non-property assets.”

Although there was no change in the number of lenders operating in the sector in Q4 2017, product numbers continued to rise. In fact, there has been a 444% increase in buy-to-let mortgage products since the index was launched in 2011, a rise resulting from lenders responding to the growing popularity of buy-to-let by offering a seemingly ever-expanding range of products to suit a variety of properties and borrowing requirements.

Browne said: “Looking forward, it is widely anticipated that buy-to-let lending will contract this year in response to the tax and regulatory measures being imposed on the sector. As such, I would expect product numbers to peak in Q1 2018 and we have already seen some lenders trimming their ranges, leaving a core of great products which have been designed to reflect the changing needs of landlords.”