Rental yields generated by residential property investors have continued an upward trend, reaching their highest level for almost two years, according to Paragon’s February buy-to-let Index.

The index showed average yields rose to 6.3% in January - their highest level since March 2006 - up from 6.2% in December. Paragon believes this increase followed a long period of yield stability at around the 6% mark throughout 2006 and 2007.

Yields are up this month on the back of rising rents, up 0.2% in January to £11,604, combined with a moderate easing of house prices, down 1.5% to £184,908. The increase in rents follows a steady upward trend since last summer, with tenants paying on average 8% more for a rental property than they did in September 2007.

Regions with the highest yields included Wales at 7.5%, and the North and North West, both of which generated yields of 7.2%. On a yearly basis, terraced properties have shown the best yield performance, growing 8.6%, followed by detached property and semi-detached property, growing 3.6% and 1.6% respectively. However, the yield generated by flats has fallen by 1.4% over the year to January 2008.

John Heron, Paragon’s director of mortgages, said: “Commentators who predicted that the current economic climate would translate into stronger demand for rented homes and higher rents are being proved right. Since September, we have seen one of the strongest periods of rental growth ever. This, together with the easing of house price inflation, has translated into higher yields.”