Buy-to-let landlords in some of Britain’s most expensive areas are facing a fresh refinancing challenge as weak rental yields risk pushing properties outside mainstream lenders’ stress tests, new research suggests.

Analysis by Octane Capital shows that, while average gross rental yields across Great Britain have held at 5.7% over the past three years, wide regional disparities leave investors in certain markets exposed.

Scotland delivered the strongest returns at 6.2%, followed by the North East (5.2%) and North West (5%).

By contrast, investors in southern regions have struggled to generate adequate returns. The South East posted a three-year average yield of just 4.1%, the lowest of any region, with the East of England and East Midlands both at 4.2% and London averaging 4.5%.

LOWEST AVERAGE YIELD

At a local authority level, the picture is even starker. Kensington and Chelsea recorded the lowest average yield in the country at just 2.8%, with Richmond upon Thames, Elmbridge and Waverley in Surrey, and the Derbyshire Dales all under 3.0%. Other weak performers included Powys (2.9%), South Hams in Devon (2.9%) and North Norfolk (3.1%).

Jonathan Samuels, chief executive of Octane Capital, said: “Our latest research shows the difficult reality for landlords in low-yielding parts of the market, where properties may no longer fit within interest coverage ratio requirements as they approach the end of their current mortgage terms.”

Under Prudential Regulation Authority rules, most lenders require rental income to cover at least 125–145% of mortgage interest at a stress rate, typically around 5.5%. With mortgage costs still elevated and rental growth slowing in some areas, landlords in low-yield markets may struggle to refinance without injecting further equity.

TIGHTER REGULATION

“For many, the result is limited refinancing options from mainstream lenders,” Samuels added. “This is where specialist finance plays a vital role. Bridging and short-term lending can provide the flexibility needed to manage the transition, whether that means restructuring, selling, or re-investing into stronger performing assets.”

The findings come as landlords contend with tighter regulation, the phasing out of mortgage interest relief, and proposals to strengthen tenants’ rights through the Renters’ Rights Bill.

Analysts warn that further attrition in the private rented sector could exacerbate already acute supply shortages, pushing up rents in stronger yielding regions even as returns stagnate elsewhere.