Calculating Profit/Yield on a Repayment Mortgage Inc Deductions

[BigPete]

Hello,

May be a stupid question as I've been staring at numbers too long, but I get that Total Rental Income - Interest Only Mortgage = Net Profit however with a repayment mortgage and allowable deductions could someone take a look at this calculation below please and confirm if it looks right?

Rental Income = £1000
Repayment Mortgage = £817
- Interest Portion = £271
- Capital Portion = £546
Allowable Deductions
Wear & Tear (10%) = £100
Fees/Servicing/Insurance etc = £290

£1000 - (£271 + £100 + £290) + £546 = Net Profit of £885

Even though the £546 goes into the mortgage (paying it off) it still has to be counted as profit?

Thanks Folks!

[jpkeates]

The fair wear and tear allowance ends next April, so ignoring that...

You can probably count the repayment as profit or not, it's up to you - it's a glass half full/empty thing like all yield calculations.

Strictly speaking I'd suggest it's probably a cost, which is 100% offset by the increase in the equity in the asset (if you were doing full P&L and capital accounts, which you're not - I hope!).
You're basically buying the property in instalments over time, swapping money for a greater share in the property asset.

[BigPete]

Ahh ok good, the reason I ask is that if it can be counted as a cost I would opt for this and therefore (in hmrc's eyes) I make a loss, thus offsetting a profit from another income source.

[jpkeates]

You can't claim the repayment as a cost against income.
You can't have your cake, eat it and not be taxed on it as well.

[Wannadonnadoodah]

I'd opt for using all the rent to overpay the mortgage each month, throw an extra £200 in of my own money and then deduct the whole lot for tax purposes, which I can't. Interest is a cost, the remainder is profit regardless of if you pay it into the mortgage, spend it, or save it.

[catdog1121]

Wannadonnadoodah,

Interest is a cost...... for now, remember this will be a long term investment, from 2017 the interest part will not be fully tax deductible, its sort of complicated but look it up.

To OP (presuming a higher rate tax payer) You have got a little confused, your capital portion is not extra income its an expense and as said 10% wear and tear is only for furnished properties (is it??? (has to be fully furnished not just part))... Try this... (You may be able to claim some from receipts but I have not added this...

Rental Income = £1000
Repayment Mortgage = £817
- Interest Portion = £271
- Capital Portion = £546
Fees/Servicing/Insurance etc = £290

now:

£1000 - (£271 + £290) = taxable Net Profit of £439

£1000 - (£817 +£290) - (tax on profit @ 40% £175.60) = total cashflow of your property -£282.60

2021:

£1000 - £290 - £135.5(tax deductible @20% not 40%) = taxable Net Profit of £574.50

£1000 - (£817 + £290) - (tax on profit @ 40% £190.20) = total cashflow of your property -£297.2



As you can see my big worry for you is your cashflow is pretty poor and your actually making very little money even taking into account of paying off the mortgage.... My figures do not include any repairs, im not sure if you factored in things like void periods, estate agent fees or tenant finding fees?

I think there is probably better places to put your money.... You should also stress test your figures so allowing for interest rates to rise say 3-4%....

[jpkeates]

It's worse than that - your 2021 example is wrong in he above post - assuming the current proposal becomes law.
The tax is not on profit, the tax is on income, with some allowed costs - and the allowance on interest is being replaced by a new restricted allowance.

2021:

£1000 - £290 = taxable Income of £710.00 (@40% = £284)
Written back restriction is 20% of £271 (=£54.20) - so the tax is £229.80 (£284 - £54.20)

£1000 - (£817 + £290) - (tax on income = £229.80 ) = monthly cashflow of your property -£336.80

Now, fair enough, you're getting £546 in equity each month for £336.80 - so the investment might be worthwhile if you can afford the monthly cost.
You're getting nearly 40% of the equity "free" each month, and if the property increases in value in parallel, it might be a good investment in the long term.

Personally, I couldn't really afford it and a 3% increase in interest rate would trash the model and you'd probably lose any "free" equity (making lots of assumptions about rents and interest rates).

[BigPete]

Thanks folks, I should have probably added at the beginning this is all aimed at the property being a pension rather than turning a cash profit every month (post mortgage costs and day to day fees/expenses etc). I'm pretty confident in the property price rising unless there is another crash as the property is a 5min walk from the main street in a major city with private parking etc. Hell if it cost me £200//month I'd just see that as the same as paying into a pension plan.

Even reading back my OP I dont know what I was thinking regarding the profit being tax free (we all wish)!

I've played my numbers a few different ways, but if anyone can recommend a good tax planner/accountant that specialises in property I would be more than willing to pay for a consultation. I have many moving parts to the big picture which seems to make the flat rate companies uninterested.

Thanks for all the help folks!

[Wannadonnadoodah]

Wannadonnadoodah,

Interest is a cost...... for now, remember this will be a long term investment, from 2017 the interest part will not be fully tax deductible, its sort of complicated but look it up.

Thanks for that, I more than fully understand the implications, I was dumbing it down for the benefit of the OP.

[catdog1121]

Sorry, you are correct JP, my theory was right but the calculations I messed up... 40% of 574.50 is 229.8 not what I had of 190.2

BigPete, houses may go up, but interest rates will definately go up, you could easily triple your monthly interest (if your interest rate is like mine about 2.3%) that could cost you approx an extra £500 a month, meaning you have to pay in 750-800 a month and you still only gain £550 a month so you would be losing money...

You could of course go interest only if it gets too bad, I would look into your expenses, is the house nearby? If so do you need an agent managing it (remember there are regulation changes you need to keep on top.). Im guessing hopefully your just being extra cautious..
Based on your mortgage amount im guessing the property is about 200-250k so 12k rent is a yeild of between 4.8-6% which as long as its a low hasstle property I would say is fairly reasonable.

[BigPete]

The rate i'd been basing stuff on was 3.79% and bumped on my calculations to 6% and while things would be tight (on my B2L and residential mortgage) it wasn't in negative numbers from monthly budgeting and personal outgoings etc.

I've recently seen a rental 4 doors down going for £1350pcm (Fully Furnished) hence why I was basing my rental value of £1000 and 2 months unoccupied to play it safe, do you think this was still on the high side?

[catdog1121]

Personally I would go for a tracker, im guessing you are looking at a fixed with that sort of rate, as long as your LTV is below 75% you should be able to find something around 2.5%, a good mortgage broker is worth a punt, find one that doesn't charge (they get paid by mortgage company), take into account though if you go for say a 2yr, after that then you will want to go to a new product not stay on SVR so choose a company that is consistently low like the coventry BS. The reason I say tracker is although I think rates will go up, Im certain they wont for at least a year so if your paying over 1% more in the first year it means the second year rates would have to jump up over 2%, I cant see rates rising that quickly so you would be better off on a tracker, of course I could be wrong, its all a gamble.

I cant really comment on your estimations, I dont know the house or the area or what type of tenants you are looking at, all these are risk factors, for example id be more comfortable taking a higher risk on a property that would be in demand for professionals or young families than say unemployed on benefits.

Only you can decide how comfortable you are, BTL is a risk, something LL haters never understand, were all greedy so and so's and should be taxed to high heaven when the market is in our favor but nobody sheds a tear or mentions us when it goes tits up. housing markets are micro markets, they can change greatly from one town to the next. My only concern with your figures is your cash flow, what if you lost your job? I would rather my BTL's that like you are on repayment mortgages at least break even from a cash flow point of view, this does mean an initial LTV of around 70% and I have been fortunate in that I pinpointed a town that I could see a big rent demand and could see house prices could rise after we came out of the recession and I was correct and they have risen by about 30% in the last 3yrs, this has had an effect of also increasing rents (Which I havent passed on too my very good tenants that are no trouble but means I have room to do so to cover the cost of the new tax changes).

Now is probably a harder time to get into BTL, house prices are higher and yields are lower in a lot of areas than a few years ago, the political climate is uncertain, with all parties wanting to attack landlords it is difficult to calculate what future governments would do especially crazy ideas from Corbyn like as a landlord you should sell your house to a tenant at a discount to market rates if they want to buy it. Add to that interest rates will eventually go up and you really do need to make sure you have a buffer in profits.