The latest Complex Buy to Let Index from Mortgages for Business has reported a widespread cooling of average yields on rental properties.
Landlords owning semi-commercial property (SCP) were the biggest losers. Yields on such properties have fallen from 7.5% in Q1 2015 to 5.9% in Q2 2015 – their lowest level in four quarters and a drop of 1.6 percentage points. Similarly, returns on houses in multiple occupation (HMOs) have dropped 1.3 percentage points to 9.3% between the first and second quarter of 2015.
Average yields for standard buy-to-let have experienced a less marked decline, dipping from 6.4% in Q1 2015 to 5.8% in Q2 2015.
Owners of multi-unit freehold blocks (MUFB) were the only winners in this quarter, with average returns on that property type rising 0.8 percentage points between Q1 and Q2 2015 to 7.1%. However, Q2 2015’s MUFB yield rate is still below the 8.6% and 9.3% returns which they enjoyed in Q3 2014 and Q4 2014 respectively.
The average loan to value (LTV) ratio has begun to fall. Average LTV rates for standard buy-to-let and multi-unit freehold blocks remained unchanged at 66% and 67% respectively between the first and second quarter of 2015.
The LTV ratio for HMOs fell a percentage point over the quarter to 69% in Q2 2015. But the largest drop was in semi-commercial property. The average LTV ratio on SCPs fell from 65% to 54% over the first two quarters of this year – a drop of 11 percentage points and the lowest LTV rate for four quarters.
David Whittaker, managing director of Mortgages for Business, said: “LTV ratios and yield rates have slid in Q2. While rental yields are still robust they seem to have lost the momentum they were gathering between the end of last year and the start of this one.
“That said, multi-unit freehold blocks seem to have avoided the yield downturn, demonstrating once again that complex property types produce higher yields because they offer tenants more features and facilities.
“While many landlords had hoped that the improving economic climate may have pushed loan to value ratios even higher, the figures appear to have stalled. Property values dipped in the second quarter, but so did average loan amounts, suggesting lenders are waiting for more signs of economic improvement before they lend any more relative to the value of a property.
“The General Election campaign also impacted on LTV ratios. With the pundits repeatedly predicting chaotic political horse-trading after May 7th, many lenders thought it best to not give too much too early. They feared a change in the policy status quo that would hit buy-to-let landlords and, with it, their ability to make mortgage repayments.”
The proportion of HMO loans for remortgaging has reached 90% in Q2 2015. The figure represents a 17 percentage point increase on Q1 2015’s percentage total and the largest proportion of any rental property type in four quarters.
Conversely, the proportion of SCP loans for remortgaging has fallen back between Q1 2015 and Q2 2015. The figure has dropped from 87% to 68% over the period – a percentage point decrease of 19 and the lowest proportion of SCP loans for remortgaging in four quarters.
The average number of mortgage lenders has increased from 31 to 32 between Q1 and Q2 2015. The figure represents the highest total in four quarters – at the start of Q4 2014 the number of lenders was just 28.
The average number of mortgage products has also risen, from 839 in Q1 2015 to 861 Q2 2015. The number is the largest in four quarters.
Whittaker added: “Remortgaging for HMOs has smashed through a glass ceiling, and it’s little wonder – the fantastic yields such properties have been offering landlords over the past year have been above the already stellar returns achieved by traditional buy-to-let.
“The number of lenders coming onto the market is also a promising sign – it shows there’s an increasing appetite for the buy-to-let market as people realise how much can be gained for relatively little pain.”
