Liverpool and Nottingham are the UK’s best performing property investment locations for landlord with average net rental yields of 6.2%, the latest research shows.
Overall rental yields in the top 10 locations in the country have increased by an average of 0.9% since May 2017 with the biggest increase of 2.2% seen in Southampton where rents are rising faster than house prices.
The latest edition of Private Finance’s buy to let hotspots analysis also shows that landlords are benefitting from reduced mortgage rates with Brighton and Hove seeing the biggest fall in borrowing rates.
Nottingham is now joint top after moving up from second position due to a £121 increase in average monthly rents. In third place is Cardiff with a net rental yields of 6%, then Southampton and Greater Manchester both at 5.9%.
The analysis report says that the current somewhat subdued buy to let sector is suffering as landlords face higher costs following a series of recent tax changes and tighter mortgage lending conditions. It adds that it is now more important than ever that landlords choose and manage their investments carefully to ensure they remain profitable.
There was a slight increase in average mortgage rates towards the end of 2017 as November brought the first interest rate rise in 10 years, up to 0.5%. However, Bank of England data shows the average two year 75% loan to value buy to let fixed rate is at its lowest point at 2.47% since tracking began in January 2012 and has fallen by 2.62% since May 2017.
As a result, many landlords across the UK will have seen their annual mortgage costs fall. Within the top 10 hotspots, Brighton and Hove has seen the biggest reduction in mortgage costs. Despite a 2.1% increase in house prices in the area in the past eight months, meaning the size of a 75% loan has increased, as a result of falling mortgage rates a landlord would now pay £6,681 in interest annually compared to £6,993 last May, a saving of £312.
However, in some areas house prices have risen too quickly for landlords to benefit from falling rates. In the top 10 hotspots, Nottingham has seen the greatest increase in house prices since the analysis was last carried out from £127,302 to £138,937, an increase of 9%. The value of a 75% loan has therefore risen from £95,477 to £104,203, and despite falling rates, annual mortgage interest costs would be higher for a landlord taking out a 75% LTV mortgage today, up from £2,521 to £2,574.
‘Finding the right buy to let location is a careful balancing act. Too large an initial investment makes it difficult to achieve a healthy yield, but landlords must also be confident that property values will appreciate at a higher rate than mortgage borrowing to achieve a long-term profit,’ said Shaun Church, director of Private Finance.
‘Strong rental demand is also key to prevent lengthy void periods that can damage affordability. While there has been some movement in the top 10 buy to let hotspots, larger cities and university towns tend to offer the greatest opportunity for investors as they offer the highest rental demand,’ he pointed out.
‘Although the buy to let sector is facing many challenges, one area where landlords have benefited is falling mortgage rates. However, seeking independent advice is becoming increasingly important for landlords to find and be accepted for the best deals. With house prices on the rise, too large a loan can negate any savings made from low rates, so landlords need to consider all aspects of their mortgage,’ he explained.
He also pointed out that there are particular challenges for portfolio landlords, classed by the Prudential Regulation Authority (PRA) as those with four or more buy to let properties. These landlords now face much more stringent affordability tests and must demonstrate the profitability of their entire portfolio to be accepted for a loan.
