Buy-to-Let Stress Testing (ICR)
Lenders stress-test buy-to-let mortgages using an Interest Coverage Ratio (ICR), typically requiring rent to cover 125% to 145% of the mortgage interest.
Following the Prudential Regulation Authority (PRA) guidelines implemented in 2017, lenders must rigorously 'stress test' buy-to-let mortgage applications to ensure landlords can still afford the debt if interest rates rise.
They do this using an Interest Coverage Ratio (ICR). For basic rate taxpayers and Limited Companies, lenders usually require the rental income to be at least 125% of the mortgage interest calculated at a stress rate (e.g., 5.5%). For higher-rate personal taxpayers, the requirement is much stricter, usually at 145% to account for their higher tax burden.
Why Limited Companies Win
Because SPVs are only stress-tested at 125%, investors can often borrow significantly more money against the same rental income by buying through a limited company rather than in their personal name.