Buy-to-Let Market Sees Record High Returns

When the Bank of England (BoE) raised interest rates from a record low of 0.1% in November 2021 to a 15-year high of 5.25% in July 2024 in a bid to tame high inflation, mortgage costs went through the roof, posing a new era of pain for Buy-to-Let landlords. Property investors grumbled as they faced the difficulty of balancing swelling mortgage bills against rental income.

As rent prices continue to soar, however, landlords are finding some solace. The average gross rental yield for newly acquired Buy-to-Let properties in England and Wales has climbed to a record 7.2%, up from 6.7% last year and 6.2% in 2022, according to recently released data.

What Is Gross Rental Yield?

The gross rental yield is the annual percentage return an investor can expect before accounting for tax and other expenses. For example, a landlord earning £10,000 in rent annually from a property valued at £200,000 would see a yield of 5%.

Why Are Rising Rents Good News for Landlords?

Average rents have skyrocketed by 40% since June 2020, compared with just 4.4% between 2016 and 2020. According to tenancy data, the average rental property in the UK now costs tenants £1,331 per month.

Experts say supply shortages, elevated rates and a leap in demand for rentals as homeownership slips out of reach for many are buoying rental prices.

Yields are climbing as rent prices have been sprinting ahead of house prices. Analysts expect that trend to continue in the coming years. But the gap between them may not be as wide as it was before.

That is because UK house prices are climbing as well, which jumped at their fastest annual pace in two years in September 2024 by 3.2%, compared with 2.4% in August of the same year, according to one mortgage lender. The upward swing is boosted by falling mortgage rates after the BoE’s cut in interest rates by a quarter of a percentage point to 5% this August.

Even so, average rates for both two-year and five-year fixed Buy-to-Let mortgages are stuck around 5.25%, chewing into landlords’ returns. But the pressure on landlords is expected to ease as lenders gradually lower their mortgage rates.

For a landlord needing a £200,000 interest-only mortgage on a five-year fix, that means coughing up £875 a month—more than double what they would have paid just a couple of years ago, when rates hovered at 2.5% and mortgage payments were £417 a month.

Who Leads the UK in Buy-to-Let Yield Growth?

Regionally, the North West has seen the biggest jump in Buy-to-Let yields, from 7.1% to 8.4% in the last two years. For a landlord with a £200,000 property, that translates to an increase in rental income from £14,200 to £16,800 a year.

Wales saw average yields climbing from 7.5% in 2022 to 8.9% this year. Even London, a market that has long struggled with sluggish yields due to soaring house prices, is starting to show signs of life: average rental yields have edged up to 5.7% from a low of 4.5% in 2017.

Meanwhile, uncertainty around tax changes in the upcoming budget has made some landlords think twice, causing the share of homes bought by property investors to sink to a 14-year low. Research shows that only one in ten homes sold during the first half of this year went to Buy-to-Let investors, the lowest proportion since records began in 2010.

Conclusion

As interest rates drop, savers might become frustrated with lower returns, making Buy-to-Let look like a more attractive option once again, translating into a recovery in residential sales volumes. But any revival in the market is likely to be led by experienced landlords who know how to handle its ups and downs, rather than by newcomers.