What is the interest coverage ratio (ICR)?
The interest coverage ratio is the main figure a lender uses to judge buy-to-let affordability. It checks whether the expected rent is high enough to cover the mortgage payment with a comfortable margin on top.
An ICR of 125% means the rent has to be at least 125% of the monthly mortgage payment worked out at the lender’s stressed rate. So if that stressed payment came to £800/month, the rent would need to be at least £1,000/month.
How do stress rates work?
A lender does not use the rate you will actually pay. Instead it works your mortgage payment out at a higher "stressed" rate, checking you could still cope if interest rates went up.
Typical stress test parameters
Why higher-rate taxpayers face a tougher test
Since Section 24 took away the option to deduct mortgage interest from rental income, higher-rate taxpayers pay more tax on their rental profit. Lenders set a stricter ICR, usually 145%, to reflect that lower net income.
How do lenders calculate rental coverage?
A worked example is the clearest way to see how a typical lender would size up 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 tests against, not the rate you would really pay.
- 02
Apply the ICR
At 125% ICR: £916.67 × 1.25 = £1,145.83. So the monthly rent has to be at least £1,146 for a basic-rate taxpayer to clear the test.
- 03
Compare with market rent
If similar properties nearby let for £1,200/month, you pass with room to spare. If the rent is only £1,000/month, you fall short and need to look at other options.
- 04
Factor in your tax band
At 145% ICR for a higher-rate taxpayer: £916.67 × 1.45 = £1,329.17. The rent would need to be a good deal higher to reach that threshold.
What if the rent doesn’t meet the stress test?
Falling short on a stress test does not shut the door on a buy-to-let mortgage. A broker has a few routes to explore.
Larger deposit
- A bigger deposit shrinks the loan, and with it the stressed payment
- This is the simplest way to clear a tighter stress test
- Even a small increase can tip the balance
Top-up with personal income
- Some lenders bring your employed or self-employed income into the sums
- That can bridge the gap when the rent falls a little short
- Usually needs a minimum income of £25,000–£50,000
Limited company (SPV)
- Buying through a special purpose vehicle can be judged on different stress criteria
- Corporation tax applies rather than personal income tax
- Section 24 does not apply to properties held by a company
Specialist lender
- Some lenders set lower stress rates or more flexible ICR requirements
- Rates may be a touch higher, but they can make a borderline deal work
- A broker can reach these lenders, which you will not find on the high street
Do you need personal income for a buy-to-let mortgage?
Most lenders ask for a minimum personal income of £25,000 a year, even though the rent does the heavy lifting on affordability. It acts as a safety net, showing you have something else to fall back on if the property sits empty or throws up an unexpected repair.
A handful of specialist lenders set no minimum income at all and decide entirely on the rental figures. These suit landlords whose income comes mostly from property, and those who have retired.
Tips to improve your BTL affordability
If the stress test is proving hard to meet, a few practical moves can strengthen your application.
Increase your deposit
- Even 5% more deposit can noticeably improve your ICR position
- A lower loan-to-value also opens up better interest rates
Target higher-yielding areas
- Some regions return much better rental yields than others
- Northern cities and university towns often yield more than London
Consider an HMO or multi-let
- A house in multiple occupation can bring in more rent per property
- Specialist buy-to-let lenders cater for HMO landlords
- Extra licensing and regulation apply
Use a limited company
- An SPV structure can be judged on different stress criteria
- Corporation tax (currently 25%) applies rather than personal income tax rates
- Mortgage interest stays fully deductible for company landlords
At Clearview Mortgage Solutions, we run the stress-test sums for you and show you which lenders would say yes to your application. Get in touch for a free affordability check.