Rental yields on ‘vanilla’ buy-to-let properties are falling, according to the latest Mortgages for Business Complex buy-to-let Index.
Gross yields on vanilla buy-to-let properties now stand at 5.9% as of Q3 2014, down from 6.3% in the second quarter and 6.4% in Q1 2014. This leaves yields for standard buy-to-let landlords at the lowest level since the final quarter of 2013, when gross vanilla yields last stood at 5.9%.
“Rents on the plainest buy-to-let properties have not kept pace with rapid price rises in many areas, suppressing average yields, said David Whittaker, managing director of Mortgages for Business.
“This illustrates two key points for landlords – location matters – and the simplest investments are not always the most lucrative.”
Other property types have much higher yields. Multi-unit freehold blocks (or MUFBs) now provide landlords with a gross yield of 8.6% in Q3 2014, up from 7.3% in the second quarter and the highest yield on record for this property type.
Houses in multiple occupation (HMOs) have seen rental yields dip to 8.9% in the third quarter, from 9.3% in Q2. This is considerably lower than the all-time record set one year ago for HMO yields, when these properties provided an average yield of 11.8% in Q3 2013. However, houses in multiple occupation still provide an extra three percentage points above vanilla buy-to-let.
Whittaker said: “Landlords with multiple tenants at each property can earn a better yield by providing what people need – often just a room rather than a whole flat. This must be done responsibly, for example HMOs often require a licence from the appropriate Local Authority, while landlords will also need a specialist mortgage product for more complex property types.
“However, if those hurdles are met, landlords can earn not just a higher, but often a more reliable return as part of a diversified investment.”
Choice between different buy-to-let mortgage products is now at a fresh all-time record. At the end of Q3, the number of available buy-to-let mortgages on the market stands at 707 separate loan products.
This compares to 637 in Q2 2014 (the previous record) and 458 available mortgage products one year ago at the end of Q3 2013.
Whittaker added: “A burst of competition in the buy-to-let mortgage market is facilitating a greater choice between different mortgages than ever before. We’re seeing prudent landlords use that trend to find a fixed rate deal while rates are low. Landlords are aware of the approaching likelihood of not just one, but a series, of gradual Bank Rate rises.
“While competition between lenders is keeping product rates low, now is the time to take advantage of that with a deal that cements the advantage of lower borrowing costs.”
