Buy-to-let yields have fallen across most regions of the UK because house prices have grown faster than rents. Lending to buy-to-let investors is falling fastest in areas with low yields and we predict it will fall a further 27 per cent over the next five years.

We’ve said previously that lending to buy-to-let landlords is falling as a changed tax regime squeezes investor margins, particularly those with borrowing. New analysis using UK Finance data allows us to see the extent to which these falls are concentrated in the UK’s most expensive housing markets, as clearly demonstrated by the two maps below.

Source: Savills using UK Finance

As shown in the chart below, lending to buy-to-let investors fell 53 per cent over the last two years in the districts with the lowest yields (sub 5 per cent). Meanwhile, they fell 36 per cent in middling districts (5-6 per cent yield) and just 19 per cent in high yielding districts (with yields over 7 per cent).

These yield figures are gross, meaning they exclude costs to the landlord including maintenance, letting fees, and void periods when the property sits empty between tenants. Net income yields may be a quarter to a third lower than gross yields. For context, the FTSE 100 currently yields 3.8 per cent.

Changes in buy to let lending by average investment yield

Source: Savills using UK Finance

Many of these lower yielding markets are in London. In Islington, pictured above, where gross yields average just 4.5 per cent, buy-to-let lending fell by almost three-quarters (72 per cent) over the last two years. In Richmond-upon-Thames, where yields average 3.8 per cent, lending fell 69 per cent.

In the past, it made sense to borrow (very often on an interest-only basis) against investment properties. Most buy-to-let investors did so. But now stricter rules around lending and reduced tax relief make buy-to-let borrowing look significantly less attractive, particularly in lower yielding markets. Since 2016, landlords have had to pass the same interest rate stress tests as owner occupiers. They must demonstrate they can charge enough rent to cover almost one and a half times their mortgage payments. And the amount of tax relief landlords can claim on their mortgage interest payments is shrinking: from 6 April 2020 relief will be limited to 20 per cent, increasing costs for higher-rate taxpayers.

This is just the beginning. We predict that buy to let lending will fall another 27 per cent by 2022. Those falls will likely be concentrated in the higher value, lower yielding markets of London and the South East.

These falls in buy-to-let lending could reduce the amount of stock available on the rental market. If cash investors don’t step in to buy up additional stock, restricted rental supply could drive up rental values.

Further information

Contact Savills Research