Interest Coverage Ratio (ICR)
Lenders use an Interest Coverage Ratio (ICR) to stress test buy-to-let mortgages, ensuring rental income covers the mortgage interest by a safe margin, typically 125% to 145%.
When you apply for a buy-to-let mortgage, lenders need to ensure that the rental income is sufficient to cover the mortgage payments, even if interest rates rise or the property suffers void periods.
To do this, they apply an Interest Coverage Ratio (ICR) stress test. For basic rate taxpayers or limited companies, the rental income usually needs to be at least 125% of the mortgage interest, calculated at a stressed rate (e.g., 5.5% or higher). For higher rate taxpayers, this requirement often jumps to 145%.
Why it matters
If the rent doesn't meet the ICR requirement, the lender will reduce the maximum amount you can borrow. This is why many investors have shifted to purchasing through Special Purpose Vehicles (SPVs), as the lower 125% ICR calculation allows them to achieve higher Loan-to-Value (LTV) limits.