Increasing property prices are causing an about-turn in rental yields, according to the latest Mortgages for Business Complex Buy to Let Index.

The report said gross yields on vanilla buy-to-let properties have dropped to 6.3% in the second quarter, down from 6.4% in Q1. This comes as modest rent rises have been outstripped by rapid growth in property values.

More complex buy-to-let properties still command considerably higher yields. Houses in multiple occupation (HMOs) saw gross yields of 9.3% in Q2 2014. While this is also down slightly from Q1 (9.6%), this gross yield remains around 50% higher than for vanilla properties.

Multi-unit freehold blocks (MUFBs) also offer a premium compared to standard buy-to-let investments. In Q2 2014 these properties commanded an average gross yield of 7.3%, almost a full percentage point higher than vanilla yields.

Landlords with standard buy-to-let properties have remortgaged at a record rate in Q2. Remortgaging now represents 70% of new vanilla buy to let mortgages. This compares to 65% in the first quarter of 2014.

Meanwhile, new purchases make up an increasing proportion of activity for more complex properties, as landlords increase their exposure to a wider variety of property types. In the second quarter of 2014, one in three (31%) mortgages for multi-units were for new purchases, up from one in four (19%) in Q1. Meanwhile, 28% of loans secured against HMOs are now for new purchases, compared to 25% in the first quarter of the year.

This comes as the choice of buy-to-let mortgages has reached a record high, with an average of 637 different products available to UK landlords in Q2 2014. Compared to the previous quarter, when landlords had a choice of around 586 mortgages, this represents growth of 8.7%. On an annual basis this leaves the number of buy-to-let mortgage products 37% greater than in Q2 2013.

As prices have risen, loan to value ratios have dipped. The average LTV on a vanilla buy-to-let mortgage in Q2 was 67%, down from 69% in Q1. Loan to value ratios for HMOs have also fallen, now standing at 70% compared to 72% in the first quarter, while loan ratios for MUFBs are steady at 66%.

David Whittaker (pictured), managing director of Mortgages for Business, said: “Within the space of six months the UK property market has seen a rising tide of optimism translate into steadily rising property prices.

“But with the yin of capital appreciation, landlords are also facing the yang of a dip in rental yields – as rent rises have not kept up with increases in purchase prices.

“Landlords are now looking more carefully at their portfolios and their financial situation. With signs that price rises may start to cool and in light of potential interest rate rises, an intelligent and diversified approach is sensible – rather than simply racing to expand as fast as possible. This is good news, as landlords show the prudence that regulators and central bankers would surely wish for.”