Substantial increase in buy-to-let returns

Paragon, the mortgage lender, has published its October Buy-to-Let Index showing the annual total return on the average buy-to-let property at its highest level since summer 2006.

The demand for rented accommodation has been fuelled by the number of potential first-time buyers deferring the purchase of a home.

This reticence on the part of first-time buyers is likely to continue until the economic environment has become more settled and confidence returns to the housing market, which many believe may have peaked.

According to Paragon’s October Buy-to-Let Index, average total return on a 12 month investment stands at 14.2%, as compared with 10.5% in September 2006.

Returns have been at their highest in Greater London (25.1%), East Anglia (24.5%) and the North (20.6%).

In the past 12 months capital appreciation has added £13,640 to the value of the typical rented property. Over the same period, rents increased 7%, reaching an average of £10,718.

The outlook for the buy-to-let sector remains positive, with recent research from Hometrack, the property website, indicating that 24% of households in England can afford to pay more than the rents charged in the social housing sector but, at the same time, are not in a financial position to purchase a property.

Nigel Terrington, chief executive of Paragon, believes that demand for private rented accommodation will grow as residential mortgage providers continue to enforce stricter lending criteria.

In addition, demand from migrant and student markets looks set to increase.

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