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Yields slide as loan to value ratio cools

Average yields on rental properties have generally cooled, according to our latest Complex Buy to Let Index

Landlords owning semi-commercial property (SCP) were the biggest losers. Yields on such properties fell 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) dropped 1.3 percentage points to 9.1% between the first and second quarter of 2015.

Average yields for standard buy to let (BTL) property 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 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.

Loan to value ratios plateau

Average LTV rates for standard BTL 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, comments:

“LTV ratios and yield rates slid somewhat 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 typically produce higher yields.

“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 BTL landlords and, with it, their ability to make mortgage repayments.”

Larger proportion of HMO loans for remortgaging

The proportion of HMO loans for remortgaging 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 fell 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.

Mortgage product and lender numbers rise

The average number of mortgage lenders increased from 31 to 32 between Q1 and Q2 2015 – Axis Bank being the new lender to the BTL market.

The figure represents the highest total since the Credit Crunch reduced the market to just two active lenders in 2009.

The average number of mortgage products has rose, from 839 in Q1 2015 to 861 Q2 2015. Again, this number is the largest in four quarters.

David Whittaker concludes,

“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 consistently above the strong returns achieved by traditional buy to let.