Yields are critical
A couple of months ago, we saw the introduction of the 145% rental cover, instead of the 125% we have been accustomed to for years. In it’s simplest form, this meant that mortgages typically would require a deposit of around 33% going forward vs 25%
However when you take yield into account this situation is even worse. The reason for this is because the lower the rent for the same value property, the bigger the deposit needed. Worcester has been highlighted as an example of an expensive area to invest with a yield of generally less than 4%. Leeds on the other hand, would generally do well against the stricter criteria as yield is around 8.5%.
Like everything, there is generally a trade-off between yield and capital growth so you need to look at your own circumstances closely. If your preference is for capital growth then you may be happier putting in a larger deposit to maximise the property value over time. On the other hand, if your aim is cash flow then buying a high yielding property that may not grow as quickly, could be the better option.
You may want to try out our “How much can I borrow?” calculator to try out different scenarios.
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