Buy-to-Let Yields: Impact of Rising Mortgage Rates

Inflation is hammering profitability for buy-to-let landlords nationwide as mortgage rates dent yields.

Many landlords must ask themselves if buying a new rental home is worthwhile when mortgage interest rates wipe out yields in many towns and cities.

Mortgage rates are trapped in a vicious economic cycle.

The Bank of England raises rates to encourage people to save rather than invest or spend.

But many landlords are in despair as rental profits and capital growth are bludgeoned at the same time.

Prices fall below the August peak.

Property investment company Track Capital says the best current buy-to-let yield of 5.7 per cent is in Scotland. The Bank of England’s official interest rate is 4.5 per cent, with many lenders hiking the rate by at least 0.5 per cent and more.

For landlords, generating rental profits has suddenly become much more challenging because the yield has to be six per cent or more to cover the mortgage plus other expenses, like tax, agent fees, insurance and maintenance.

The good news for buyers is property prices are dropping a little, but lenders feel the market still has room for a price correction.

Nationwide’s The Mortgage Works brand is one of the largest buy-to-let lenders. Nationwide's chief economist Robert Gardner said: “Following tentative signs of improvement in April, annual house price growth softened again in May. This largely reflects base effects with prices broadly flat over the month after taking account of seasonal effects. Average prices remain four per cent  below their August 2022 peak.

Buy to let yields where you are

“Headwinds to the housing market look set to strengthen in the near term. While consumer price inflation did slow in April, it was a much smaller decline than most analysts had expected. As a result, investors’ expectations for the future path of bank rate increased noticeably in late May, suggesting it could peak at 5.5 per cent well above the 4.5 per cent peak that was priced in around late March. Furthermore, rates are also projected to remain higher for longer.”

So what are the average yields a buy to let investor should expect?

The amount varies across the country depending on property prices. Likely the most expensive property returns the lowest yield:

Buy to let yields FAQ.

How to work out buy to let yields.

Working out the rental yield for a rented home or holiday let is not complicated.

• Take the annual rental income for the property
• Divide the income by the value of the property
• Multiply by 100 to give the yield as a percentage

Here’s a worked example for a buy-to-let home worth £250,000 rented for £690 a month:

• Annual rent = £690 x 12 = £8,280
• Divide £8,280 by £250,000 = 0.033
• Multiply 0.333 by 100 = 3.3 per cent

In this example, the property’s yield is 3.3 per cent.

Note the yield is a gross, not a net figure. If you want the net figure after paying any mortgage or business expenses, add the interest and costs, then deduct them from the rent before dividing them by the property price.

Are interest rates likely to go up?

The government has signalled that the Bank of England can squeeze interest rates even more in the short term to bring inflation under control by the end of the year, so landlords should expect rates to increase again.

What’s the current best mortgage rate?

The best mortgage rates for buy-to-let, according to the Moneyfacts website, are:

• Two-year fix: 4.2 per cent
• Three-year fix: 4.84 per cent
• 80 per cent loan-to-value: 4.99 per cent

Where can I see more yield data?

Try the buy-to-let blog on letting agent Hamptons website, which has an interactive map of the UK listing yields broken down by property type and council area.