Average Yields Rise To 10% On Complex Buy To Let Deals 12.07.2011
Yields on Houses in Multiple Occupation have risen to 10% in Q2 2011
Rising rents cause yield growth across complex and vanilla BTL mortgages
Number of BTL products rises 35% quarter-on-quarter
However, lenders attempting to reduce risk force MUFB investors to refinance elsewhere
Average buy to let yields have risen quarter-on-quarter with vanilla products now offering 5.8% and complex deals offering up to 10%, according to Mortgages for Business, the broker and packager.
The total number of buy to let mortgage products has risen 35% over the last three months with 403 BTL deals now on the market compared to 298 in April. This rise in the number of products is a result of an increased number of lenders (now 22 compared to 19 in April) and the demand from BTL investors for more product diversity. Demand for rental properties continues to outstrip supply and this has pushed rents higher and driven the growth of average yields. Average yields from vanilla BTL mortgages rose to 5.8% from 5.6% in April.
Complex BTL deals continue to provide the best yields for professional investors. Houses in Multiple Occupation (HMO) mortgages are now offering average yields of 10% - up from 9.3% last quarter. Average LTVs for HMO deals has fallen to 60% from 63% in April. Lending conditions have improved in this sub-sector thanks to increased competition in the market from new entrants such as KRBS and Whiteaway Laidlaw Bank and continued support from Paragon, TMW and Aldermore.
Multi-unit Freehold Block (MUFB) deals also provide good returns for investors but yields have fallen The average MUFB mortgage yield is now 6.6%, down from 7.4% last quarter however this is due to a rise in higher value MUFB purchases over the last three which has put downward pressure on average yields. Average LTVs for MUFB deals have risen to 59% from 56% last quarter. However, lenders looking to reduce their risk exposure are forcing MUFB investors to refinance elsewhere. This quarter, the proportion of purchases versus remortgages in this sector were 19% vs 81%. A dramatic swing from the 41% (purchase) versus 59% (remortgage) last quarter.
David Whittaker, managing director at Mortgages for Business, commented:
“Languishing property prices and rising rents have created a perfect storm for professional investors and landlords. The yields on offer on investment properties are incredibly lucrative and with the owner-occupier market unlikely to change dramatically over the next eighteen months the returns for investors will be healthy for some time to come.”
Full details of the MFB Complex Buy to Let Index appear below.
MFB Complex Buy to Let Index
This quarterly industry index reports on mortgage transactions for Houses in Multiple Occupation (HMO) and Multi-unit Freehold Blocks (MUFB) compared to vanilla buy to let transactions.
Lenders and Products
| Q1 2011 | Q2 2011 | |
| Average no. products | 298 | 403 |
| Average no. lenders | 19 | 22 |
Lenders and Products: Encouragingly both the number of lenders and products has increased giving rise to better competition in the market. New lenders to the buy to let market in this quarter were KRBS (Kent Reliance), Mortgage Trust Online (Paragon) and Skipton.
Vanilla Buy to Let Mortgages
| 2010 | Q1 2011 | Q2 2011 | |
| Average loan size | £120,250 | £116,238 | £126,522 |
| Average property value | £190,000 | £175,819 | £187,708 |
| Average loan to value | 63% | 66% | 67% |
| Average yield | 4.75%* | 5.6% | 5.8% |
*Source: There is no published data for 2010. ARLA’s last published figure was.4.66% in Q1 2008.We have estimated a slight year-on-year rise based on demand for rental properties continuing to outstrip supply. Going forward this information is recorded on our database.
Vanilla BTL: Q2 saw steady growth across this sub-sector. Whilst the average loan size and loan to value figures have risen, so too has the average yield which re-enforces press reports that rents are rising due to demand for rental properties continuing to outstrip supply. With slightly more purchases than remortgages (see bottom table), we continue to see many landlords remortgage to fund further property purchases.
Houses in Multiple Occupation (HMO)
| 2010 | Q1 2011 | Q2 2011 | |
| Average loan size | £287,800 | £317,907 | £321,836 |
| Average property value | £469,000 | £501,290 | £573,836 |
| Average loan to value | 61% | 63% | 60% |
| Average yield | 8.7% | 9.3% | 10.0% |
HMO: Lending options continue to improve in this sub-sector with KRBS and WLB bringing much needed competition to the market. Paragon, TMW and Aldermore also remain extremely supportive. LTVs are holding relatively steady and as seen across the sector as a whole, yields carry on rising, albeit at a measured pace.
Multi-unit Freehold Blocks (MUFB)
| 2010 | Q1 2011 | Q2 2011 | |
| Average loan size | £470,900 | £527,902 | £513,197 |
| Average property value | £828,050 | £932,148 | £876,075 |
| Average loan to value | 57% | 56% | 59% |
| Average yield | 5.3% | 7.4% | 6.6% |
MUFB: In this last quarter we have seen MUFBs of a higher quality hence the slight reduction in yield. Otherwise, the figures seem to be holding firm with activity set to increase in this sub-sector as certain banks look to reduce their exposure on this type of asset.
Purchases versus Remortgages Q1 2011
Q1 2011 Q2 2011
| Purchase | Remortgage | Purchase | Remortgage | |
| Vanilla BTL | 50% | 50% | 55% | 45% |
| HMO | 67% | 33% | 48% | 52% |
| MUFB | 41% | 59% | 19% | 81% |
Purchases v Remortgages: Whilst vanilla BTLs and HMOs have seen a fairly even split between the number of purchases and remortgages, the numbers of MUFBs undergoing remortgage transactions has risen dramatically as RBS and other lenders continue to force borrowers to refinance elsewhere.
