Buy-to-let yields improve

Property investors are returning to the buy-to-let market as the outlook for the sector improves, with rental yields in certain UK postcodes now rising as high as 8 per cent.

Southampton emerges as the top location for residential property returns, providing a strong yield of 8.12 per cent, according to an analysis of the top 50 postcodes for buy-to-let investment by the website Findaproperty.com.

It is followed by Leeds in West Yorkshire and Virginia Water in Surrey, with rental yields of 7.52 per cent and 7.50 per cent, respectively.

The research, which was carried out exclusively for FT Money, shows that there are now 49 postcodes across the UK achieving returns of more than 6 per cent – 12 of which are in London.

“Landlords in the private rented sector have enjoyed a buoyant start to 2011, with growing levels of tenant demand, rising rents and strengthening yields,” says Nigel Terrington of Paragon, the buy-to-let lender.

And with high levels of tenant demand set to continue for the foreseeable future – as more and more first-time buyers are unable to get on to the property ladder – analysts say the outlook for buy-to-let property is good.

This confidence has already seen an increase in the number of buy-to-let applications in the first three months of the year. Andy Young of TBMC, a buy-to-let mortgage broker, reports a 62 per cent increase in the number of mortgage applications in that period, compared with the first quarter of 2010.

TBMC’s research shows that, over the last two quarters, landlords have been predominantly buying buy-to-let properties in London, followed by Portsmouth, Sheffield and Brighton.

Young believes the buy-to-let mortgage market, particularly for amateur landlords, has become more competitive in the past two to three months than it has been for the past three years.

“More and more lenders, particularly building societies, are moving into the buy-to-let space,” he says. “We’ve currently got six exclusive mortgage offers with different lenders. Previously, we didn’t have a single one for three years.”

The availability of finance for professional landlords is beginning to improve, too. Last week, Whiteaway Laidlaw, a Manchester-based bank that was sold by Manchester Building Society to RBS Equity Finance in January, began offering mortgages to experienced buy-to-let investors.

The bank will target more complex buy-to-let lending scenarios, such as Houses in Multiple Occupation (HMOs), large portfolios and semi-commercial properties – an area of the market currently serviced by Paragon, Aldermore and other commercial banks.

David Whittaker of Mortgages for Business, the broker, says the launch of Whiteaway Laidlaw will increase the finance options for those large-scale landlords looking to grow their portfolios.

However, not all buy-to-let lenders are loosening their lending criteria. This week, The Mortgage Works, a subsidiary of Nationwide Building Society and one of the biggest buy-to-let lenders, introduced a less attractive rental cover requirement for its range of 80 per cent loan-to-value products.

It has increased the rental coverage from 125 per cent of the monthly payment, based on the mortgage rate or 4.99 per cent, whichever is higher, to 125 per cent of the monthly payment, based on the mortgage rate or 5.99 per cent. Nigel Bedford of Largemortgageloans.com says this change will decrease the maximum loan for any given rental income.

Under the previous rental coverage, at 80 per cent loan-to-value a rental income of £1,000 per month would have allowed borrowing of £192,384. This falls to just £160,267 under the new terms. “The new rental coverage is a bit of a kick in the teeth,” says Bedford.

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