Nottingham and Liverpool battle it out to be crowned the UKs number 1 BTL hotspot

Warren Lewis
26th January 2018
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The latest edition of Private Finance’s buy-to-let analysis has revealed that Liverpool and Nottingham are the UK’s best performing property investment locations.

Both cities enjoy average rental yields of 6.2% once mortgage costs are taken into account. While Liverpool has retained its position since May 2017 – despite lower rental yields due to falling rental prices in this area – Nottingham has moved up from second position thanks to a £121 increase in average monthly rents.

The subdued BTL sector is suffering as landlords face higher costs following a series of recent tax changes and tighter mortgage lending conditions. It is now more important than ever that landlords choose and manage their investments carefully to ensure they remain profitable.  

In third position is Cardiff, with average yields of 6.0%: the city has risen four places in the top 10 BTL hotspots, again thanks to a notable increase in average monthly rental prices (from £946 to £1,301).

Southampton (rising from eleventh position) and Greater Manchester (up from fifth position) also make up the top five BTL hotspots in January 2018, with both destinations offering rental yields of 5.9.

Across the top 10 hotspots, rental yields have risen by an average of 0.9 percentage points (pp) since May 2017, with Southampton experiencing the biggest increase (2.2 pp). This increase is due to rents rising faster than house prices (20% increase in rents vs. 6% increase in house prices since May 2017 across the top 10 hotspots).

Landlords benefit from falling mortgage rates

There was a slight increase in average mortgage rates towards the end of 2017 as November brought the first interest rate rise in 10 years (to 0.5%).  However, Bank of England data shows the average two year (75% loan-to-value) BTL fixed rate is at its lowest point (2.47%) since tracking began in January 2012 and has fallen by 15 basis points (bp) since May 2017 (2.62%). 

As a result, many landlords across the UK will have seen their annual mortgage costs fall. Within the top 10 hotspots, Brighton and Hove has seen the biggest reduction in mortgage costs. Despite a 2.1% increase in house prices in the area in the past eight months (meaning the size of a 75% loan has increased), as a result of falling mortgage rates a landlord would now pay £6,681 in interest annually compared to £6,993 last May: a saving of £312.

However, in some areas house prices have risen too quickly for landlords to benefit from falling rates. In the top 10 hotspots, Nottingham has seen the greatest increase in house prices since the analysis was last carried out (from £127,302 to £138,937 – an increase of 9%). The value of a 75% loan has therefore risen from £95,477 to £104,203, and despite falling rates, annual mortgage interest costs would be higher for a landlord taking out a 75% LTV mortgage today (up from £2,521 to £2,574).

Shaun Church, Director of Private Finance, comments: “Finding the right buy-to-let location is a careful balancing act. Too large an initial investment makes it difficult to achieve a healthy yield, but landlords must also be confident that property values will appreciate at a higher rate than mortgage borrowing to achieve a long-term profit. Strong rental demand is also key to prevent lengthy void periods that can damage affordability. While there has been some movement in the top 10 buy-to-let hotspots, larger cities and university towns tend to offer the greatest opportunity for investors as they offer the highest rental demand.

Though the buy-to-let sector is facing many challenges, one area where landlords have benefited is falling mortgage rates. However, seeking independent advice is becoming increasingly important for landlords to find and be accepted for the best deals. With house prices on the rise, too large a loan can negate any savings made from low rates, so landlords need to consider all aspects of their mortgage.
There are particular challenges for portfolio landlords, classed by the Prudential Regulation Authority (PRA) as those with four or more buy-to-let properties. These landlords now face much more stringent affordability tests and must demonstrate the profitability of their entire portfolio to be accepted for a loan. An independent mortgage broker can help investors navigate these tricky waters and find the most affordable and suitable option for them.”

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