A client came to us recently with a portfolio of three London properties, all producing what he described as “decent yields.” When we actually sat down and calculated his net position after management fees, voids, insurance and maintenance, two of the three were barely breaking 2.5%. On paper they looked fine. In reality, they were costing him more than he realised.
This is one of the most common blind spots among buy-to-let investors, even experienced ones: confusing gross yield for net yield and not understanding how either figure affects what you can actually borrow.
Gross yield vs net yield and why the difference matters
Gross rental yield is the starting point. It’s simply your annual rental income expressed as a percentage of the property’s value.
Gross yield formula: (Annual rent ÷ Property value) × 100
Net rental yield is the number that actually matters. It strips out the costs you’ll inevitably incur as a landlord: letting agent fees, maintenance, landlord insurance, ground rent and service charges (if leasehold), and a realistic allowance for void periods.
Net yield formula: ((Annual rent − Annual costs) ÷ Property value) × 100
Worked example:
Say you own a flat in Newham worth £450,000, renting for £1,600 per month.
| Annual rent | £19,200 |
| Gross yield | 4.27% |
| Less: management fees (10%) | £1,920 |
| Less: maintenance allowance | £1,000 |
| Less: landlord insurance | £400 |
| Less: void allowance (3 weeks) | £1,108 |
| Net annual income | £14,772 |
| Net yield | 3.28% |
That gap — from 4.27% to 3.28% — is the difference between what looks good in a spreadsheet and what actually lands in your pocket.
TRY OUR RENTAL YIELD CALCULATOR
What counts as a good rental yield in London in 2026?
Across Greater London, the average gross yield sits at 3.5%, according to data published by RentalYield.uk in June 2026, derived from HM Land Registry prices and VOA rental statistics. That’s marginally below the England average of 3.6%, which tells you something important: London’s total return case has always rested more on capital growth than income.
That said, there’s a wide spread across the boroughs.
London rental yields by borough (June 2026)
| Borough | Avg Gross Yield | Median Price | Monthly Rent |
| Greenwich | 4.4% | £450,000 | £1,600 |
| Barking & Dagenham | 4.3% | £365,000 | £1,350 |
| Newham | 4.2% | £449,500 | £1,600 |
| Bexley | 4.2% | £392,000 | £1,350 |
| Lambeth | 3.9% | £529,000 | £1,800 |
| Southwark | 3.9% | £585,000 | £1,820 |
| Tower Hamlets | 3.7% | £520,000 | £1,900 |
| Brent | 3.6% | £520,000 | £1,600 |
| Westminster | 3.0% | £1,535,500 | £2,622 |
| Camden | 2.95% | £950,000 | £2,102 |
| Kensington & Chelsea | 2.8% | £1,150,000 | £2,557 |
| City of London | 2.2% | £1,056,000 | £2,159 |
Source: RentalYield.uk, June 2026. Based on HM Land Registry and VOA data.
A gross yield above 4% in London is generally considered strong in the current market. Anything above 5% is exceptional and in Greater London at least, tends to be found in specific outer east postcodes rather than across entire boroughs. For net yield, a realistic target for a well-run London portfolio sits between 3% and 3.5%.
How yield affects your BTL mortgage affordability
This is where a lot of investors hit an unexpected wall. Lenders don’t just care about the headline yield they care about whether your rental income covers the mortgage at a stressed interest rate.
Most UK buy-to-let lenders currently apply the following Interest Coverage Ratio (ICR) tests:
- 125% ICR for basic-rate taxpayers and limited companies
- 145% ICR for higher- or additional-rate taxpayers borrowing in personal name
The stress rate applied varies by product type. On a five-year fixed rate, most lenders stress at the actual pay rate. For shorter fixes and tracker products, they’ll typically add 1–2% on top.
What this means in practice:
Say you’re purchasing a property for £400,000 with a 75% LTV mortgage (£300,000). You’re a higher-rate taxpayer borrowing personally, and the lender stresses at 5.5%.
| Mortgage balance | £300,000 |
| Stressed interest (5.5%) | £16,500/year |
| ICR required (145%) | × 1.45 |
| Minimum rent required | £23,925/year (£1,994/month) |
If your actual rent is £1,700 per month, you fail the stress test regardless of what the gross yield looks like. This catches many investors off guard, particularly those buying in higher-priced boroughs where rents haven’t kept pace with property values.
Operating through a limited company can help here: the 125% ICR threshold is more achievable, and you retain full mortgage interest deductibility something individual landlords lost with the phasing out of Section 24 relief. If you’re building or expanding a portfolio, it’s worth having that conversation with a us and your tax advisor before you purchase.
When low yield still makes sense
Not every London investment lives or dies by its income return. Prime central areas: Westminster, Kensington, Chelsea, parts of Camden have historically delivered capital growth that dwarfs their rental yield. An investor who bought in Notting Hill a decade ago at a 2.5% gross yield has likely seen that capital appreciation more than compensate.
For HNW clients with a long investment horizon, low-yield prime London property is often held as a wealth preservation strategy rather than an income play. The calculus shifts: you’re not running a yield-driven model, you’re holding appreciating sterling assets in a globally liquid market.
That said, this approach requires the right financing structure. Interest-only BTL mortgages are the standard here, keeping monthly costs manageable while the capital appreciates. Some lenders will consider asset-backed lending in these circumstances, where the broader balance sheet is considered rather than just the rental income on a single property.
Improving your yield: the practical levers
Before chasing yield in a different postcode, it’s worth asking whether there’s yield to be unlocked in what you already own. Management fee renegotiation, letting directly rather than through an agent, and ensuring the rent is genuinely at market rate (not left untouched since a 2021 tenancy) can all shift the net position meaningfully. For new acquisitions, the key variables are property type (HMOs and multi-let properties often yield 6–8% but carry higher management overhead), location (outer east London continues to offer the best income returns within Greater London), and structure (limited company vs personal name, interest-only vs repayment).
Frequently Asked Questions
How do I calculate gross rental yield?
Divide your annual rent by the property value, then multiply by 100. For example, £18,000 annual rent on a £400,000 property = 4.5% gross yield.
What is a good rental yield in London in 2026?
The London average is 3.5% gross. A yield above 4% is considered strong for Greater London; above 5% is exceptional. After costs, aim for a net yield of at least 3% for the investment to make sense on an income basis.
Which London boroughs have the highest rental yields?
As of June 2026: Greenwich (4.4%), Barking & Dagenham (4.3%), Newham (4.2%), and Bexley (4.2%) are the top performers. All are in outer east or south-east London, where property prices are more modest relative to rental demand.
Which London boroughs have the lowest rental yields?
The City of London (2.2%), Richmond upon Thames (2.7%), and Kensington & Chelsea (2.8%) consistently sit at the bottom. High property values are the primary driver — rental income simply cannot keep pace.
What is a BTL stress test?
It’s the affordability check lenders apply to buy-to-let mortgage applications. Your rental income must cover a stressed version of the mortgage interest — typically at 125% ICR for limited companies and basic-rate taxpayers, or 145% for higher-rate taxpayers borrowing personally. Lenders stress the interest rate at 5.5% for five-year fixed products (or higher for shorter terms).
Does yield affect how much I can borrow on a BTL mortgage?
Yes, directly. If your rental income doesn’t meet the lender’s ICR threshold at the stressed rate, the mortgage won’t be offered at that loan size regardless of your personal income. Your broker should run this calculation before you commit to a purchase price.
Is it better to buy through a limited company for BTL?
For higher-rate taxpayers building a portfolio, a limited company structure often makes more sense, you retain full mortgage interest deductibility (unlike personally-held properties post-Section 24), and lenders apply the more favourable 125% ICR. There are set-up and accounting costs to consider, and stamp duty still applies. A specialist mortgage broker and a property-savvy accountant should both be involved in that decision.
What is the difference between yield and return on investment (ROI)?
Yield looks purely at income relative to property value. ROI is broader — it incorporates capital growth and the return on your actual equity (deposit plus costs), not the full property price. A 3.5% yield on a property you bought with a 25% deposit may translate to a much higher ROI once leverage and appreciation are factored in.
Can I improve my rental yield without moving property?
Often, yes. Reviewing your management fee structure, ensuring your rent is at market rate, and reducing void periods through proactive tenancy management can all improve your net yield without changing your asset base.
The figures in this article are for illustrative purposes. Tax treatment depends on individual circumstances, and the buy-to-let market is subject to change. If you’re reviewing your portfolio strategy or considering a new BTL acquisition, speak to one of our advisers — we work with landlords at every scale, from single properties to complex multi-asset portfolios.
