The bank look at interest cover when they are assessing the investment (amongst other things such as your other income etc).
For a basic rate tax payer, they usually want rent to be 125% of the interest payment … but they don’t usually use the interest rate you are paying, they use a ‘stress’ rate - this varies from lender to lender, but 5% is common.
Thanks Cath
Another great tip!
Yes that is what happened.
When I first let the flat I looked at the HMRC web site & thought great I just need to declare the earnings minus £1k & pay tax so I didn’t keep any other records. I now know this was a mistake & need to keep them anyway.
Hi yes I had a look at the 25 & 75% deductions but the mortgage interest is only £30 a month.
My first tenancy started on the 06/04/19 & although I spent £2k on decorating & flooring I wasn’t aware that I could claim for it at the time so just declared the first months rent that was paid in advance.
As Cath2 noted, you have a choice of ROI (return on investment, or gross yield.
Strictly speaking, for your own financial performance, you should use the ROI calculation. As with any investment your return is directly related to your total cash investment. Having said that, the current value is effectively tying up the equity from the increase in the property’s value, which is potentially cash in your pocket, after tax.
If you were looking to buy or sell a property, then the gross yield is the figure buyers and sellers would use.
There is also the aspect of appreciation in your ROI, both natural and forced, i.e. the difference between your purchase costs and the current value is an added ROI on an annual basis, assuming there is annual increase in its value. Where as your forced appreciation is the difference in the purchase cost and the uplifted value resulting from your improvements to the property in your first year.
There’s a very good book, albeit an American author and examples from that country, called “Building Wealth” by Russ Whitney. Well worth a read.
Good luck in your ventures.