Nottingham Rivals Liverpool as Top Buy-to-Let Hotspot in UK

Nottingham and Liverpool have been named the UK’s best performing property investment locations, the latest Buy-to-Let Hotspots analysis from Private Finance reveals.

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

The subdued buy-to-let 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, Private Finance notes, that landlords choose and manage their investments carefully, to ensure that they remain profitable.

In third position is Cardiff, with an average yield of 6.0%. The city has risen four places in the top ten buy-to-let hotspots, again thanks to a notable increase in the average monthly rent price (from £946 to £1,301).

Southampton (rising from 11^th position) and Greater Manchester (up from fifth place) also make up the top five buy-to-let hotspots in January, with both locations offering an average rental yield of 5.9%.

Nottingham Rivals Liverpool as Top Buy-to-Let Hotspot in UK

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

Top ten buy-to-let hotspots

1: Liverpool – 6.2%

1: Nottingham – 6.2%

3: Cardiff – 6.0%

4: Southampton – 5.9%

4: Greater Manchester – 5.9%

6: Coventry – 5.4%

7: Edinburgh – 5.2%

8: Leicester – 4.8%

9: Brighton & Hove – 4.7%

10: Bournemouth – 4.6%

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 ten years (to 0.5%). However, Bank of England (BoE) data shows that the average two-year buy-to-let fixed rate on a 75% loan-to-value (LTV) deal is at its lowest point (2.47%) since tracking began in January 2012 and has fallen by 15 basis points since May 2017 (2.62%).

As a result, many landlords across the UK will have seen their annual mortgage costs fall. Within the top ten hotspots, Brighton & Hove has seen the greatest reduction in mortgage costs. Despite a 2.1% increase in the average house price in the area over the past eight months (meaning that the size of a 75% loan has risen), as a result of falling mortgage rates, a landlord would now pay £6,681 in interest annually, compared to £6,993 in May 2017 – a saving of £312.

However, in some locations, house prices have risen too quickly for landlords to benefit from falling rates. Within the top ten hotspots, Nottingham has witnessed the greatest increase in house prices since the analysis was last conducted (from an average of £127,302 to £138,937) – growth of 9%. The value of an average 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 (from £2,521 to £2,574).

The Director of Private Finance, Shaun Church, comments on the report: “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 ten 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.”

He continues: “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.”