What is the interest coverage ratio (ICR)?
The interest coverage ratio is the key metric lenders use to assess buy-to-let affordability. It measures whether the expected rental income is high enough to cover the mortgage payments with a comfortable buffer.
An ICR of 125% means the rent must be at least 125% of the monthly mortgage payment calculated at the lender’s stressed rate. So if the stressed payment would be £800/month, the rent needs to be at least £1,000/month.
How do stress rates work?
Lenders don’t use the actual rate you’ll pay. Instead, they calculate your mortgage payment at a higher “stressed” rate to ensure you could cope if interest rates rise.
Typical stress test parameters
Why higher-rate taxpayers face a tougher test
Since Section 24 removed the ability to deduct mortgage interest from rental income, higher-rate taxpayers pay more tax on their rental profits. Lenders apply a stricter ICR (typically 145%) to account for this reduced net income.
How do lenders calculate rental coverage?
Here’s a worked example showing how a typical lender would assess a buy-to-let application.
Worked example: £200,000 BTL mortgage
- 01
Calculate the stressed payment
£200,000 at 5.5% interest-only = £916.67 per month. This is the hypothetical payment the lender uses, not your actual rate.
- 02
Apply the ICR
At 125% ICR: £916.67 × 1.25 = £1,145.83. The monthly rent must be at least £1,146 for a basic-rate taxpayer to pass the test.
- 03
Compare with market rent
If comparable properties in the area rent for £1,200/month, you’d pass comfortably. If rent is only £1,000/month, you’d fail and need to explore alternatives.
- 04
Factor in your tax band
At 145% ICR (higher-rate taxpayer): £916.67 × 1.45 = £1,329.17. The rent would need to be significantly higher to meet this threshold.
What if the rent doesn’t meet the stress test?
Failing a stress test doesn’t mean you can’t get a BTL mortgage. There are several options a broker can explore.
Larger deposit
- A bigger deposit reduces the loan and therefore the stressed payment
- This is the most straightforward way to pass a tighter stress test
- Even a small increase can make the difference
Top-up with personal income
- Some lenders factor in your employed or self-employed income
- This can bridge the gap when rental income falls slightly short
- Usually requires minimum income of £25,000–£50,000
Limited company (SPV)
- Buying through a Special Purpose Vehicle may use different stress criteria
- Corporation tax applies instead of personal income tax
- Section 24 doesn’t apply to company-held properties
Specialist lender
- Some lenders have lower stress rates or more flexible ICR requirements
- Rates may be slightly higher but can make borderline deals viable
- A broker has access to these lenders that you won’t find on the high street
Do you need personal income for a buy-to-let mortgage?
Most lenders require a minimum personal income of £25,000 per year, even though rental income is the primary affordability measure. This acts as a safety net, ensuring you have other resources to fall back on if the property is empty or needs unexpected repairs.
Some specialist lenders have no minimum income requirement and base their decision entirely on the rental figures. These are useful for landlords whose income comes mainly from property, or for those who are retired.
Tips to improve your BTL affordability
If you’re finding it hard to meet stress-test requirements, there are practical steps you can take to strengthen your application.
Increase your deposit
- Even 5% more deposit can significantly improve your ICR position
- Lower LTV also unlocks better interest rates
Target higher-yielding areas
- Some regions offer much better rental yields than others
- Northern cities and university towns often provide higher yields than London
Consider an HMO or multi-let
- Houses in multiple occupation can generate higher rental income per property
- Specialist BTL lenders cater for HMO landlords
- Additional licensing and regulations apply
Use a limited company
- SPV structures may benefit from different stress criteria
- Corporation tax (currently 25%) vs personal income tax rates
- Mortgage interest remains fully deductible for company landlords
At Clearview Mortgage Solutions, we run the stress-test calculations for you and show you exactly which lenders your application would pass with. Get in touch for a free affordability check.