Paragon Mortgages’ July buy-to-let index shows landlords’ rental incomes up strongly by 2.79% from the previous month. Property values rose by even more with a 5.54% rise as the market continues to pick up on the back of growing buying activity from spring into summer.

Rental incomes rose to £9,133 from £8,930 last month, the largest increase in 10 months and rents are now 5.18% higher than a year ago. Buy-to-let rents are clearly rising at well above retail price inflation rates, which mirrors the strong growth in rental demand.

At the same time, the average value of properties purchased by landlords rose from £111,712 to £117,902, which reflects the general recovery in the residential market. With the rise in property values, buy-to-let rental yields declined slightly (down 2.6%) to 7.75% - against the trend of the past few months.

John Heron, managing director of Paragon Mortgages, comments:

“Since March this year, landlords have enjoyed steadily rising rental incomes, helped by strong and sustained demand from tenants – many of them prospective first time buyers who have been unable or unwilling to make that initial leap onto the housing ladder.”

“To meet this tenant demand, they have been building their portfolios and have benefited from a slower market for owner-occupiers, enabling landlords to snap up homes at very attractive prices.”

“More recently, with market activity picking up, bargain house prices have been more difficult to achieve and this is reflected by the very high 5.54% house price rise recorded this month. This has had a negative impact on yields – which have slipped from 7.95% to 7.75%.”

Across the country

There are some signs of yields evening out across the country, as most higher-yielding areas saw slight falls while lower yielding regions (Greater London notably) saw marginal rises. The North is now the only region where landlords are achieving double-digit yields (10.45%) – and is also the region with the cheapest properties (£51,779).

Yorkshire, having registered a 1.8% increase in rental incomes this month, also saw a sharp rise in property values, which led to a fall in yields, down from 10.28% to 9.57%. As a result, the North West has now taken over as the second highest yielding region in the country, at 9.64%.

As previously, landlords achieve the best returns from terraced and semi-detached properties, which remain perennially popular with tenants – offering a yield of 9.13% and 8.24% respectively, while flats offered the lowest return of 6.99%, down from last month’s 7.28%. Yields on detached houses average 7.73%.

In terms of total overall return (taking into account both property value appreciation and rental income over the year), the Midlands, both East and West, have proved the best place to invest in residential property. In the East Midlands, landlords have enjoyed total gross returns of 56.51% and in the West Midlands 64.65%.

Overall returns of around 45% were achieved in East Anglia and Wales (45.25% and 44.92% respectively) while the lowest figures were in Yorkshire and the North, where appreciation in landlord property values was low or non-existant.

Nationally, the average total return was 29.43% (on a typical property bought a year ago), equivalent to £28,781 – up on the previous month’s 27.77% and £26,126 and boosted by buoyant house price inflation since last month.

The Paragon Mortgages Buy-to-Let Index tracks on a monthly basis key indicators relating to buy-to-let, in particular yields, landlord property values and rental incomes. The index is the only statistical indicator of the buy-to-let market in England and Wales and is compiled monthly from data on the company’s own mortgage book for the country.

Figures for the index are weighted by region and property type, but are not seasonally adjusted; each month’s report is based on mortgage lending up to the last day of the preceding month. The typical Paragon Mortgages borrower has more than 11 properties in their portfolio and 30% of all customers have debt facilities exceeding £1 million.