Interest coverage ratio
The interest coverage ratio (ICR), also called the interest cover ratio, is the affordability test lenders apply to buy-to-let mortgage applications. It measures whether the expected rental income from a property is sufficient to cover the mortgage interest at a stressed rate, a notional rate higher than the actual product rate, designed to simulate future rate rises. The Prudential Regulation Authority's Supervisory Statement SS13/16, in force since January 2017 and updated through 2024, sets out the regulatory framework within which lenders must calculate and apply ICR tests.
The ICR formula
The basic formula is:
ICR = Annual rental income ÷ Annual stressed mortgage interest
The result is expressed as a percentage. If annual rent is £15,000 and the stressed annual interest on the loan is £11,000, the ICR is 136% (£15,000 ÷ £11,000 = 1.36 or 136%). Most lenders calculate monthly figures and annualise them, but the ratio is the same.
The critical variable is the stressed interest rate, not the actual product rate. Lenders apply a notional stress rate, typically 5.5% or the product rate plus 2%, whichever is higher, to calculate what the annual interest cost would be if rates rose. For five-year-plus fixed-rate products, the PRA permits lenders to apply a lower stress rate (sometimes the product rate itself), on the basis that interest-rate risk over the fixed period is removed. This is why a five-year fix at a marginally higher product rate can sometimes support greater borrowing than a two-year fix at a lower rate.
The two thresholds: 125% and 145%
Most UK buy-to-let lenders apply one of two minimum ICR thresholds, depending on the borrower's tax position:
125% - for basic-rate income taxpayers and limited company borrowers. This is the standard threshold and reflects a position where rental income can comfortably absorb stressed mortgage costs.
145% - for higher-rate and additional-rate income taxpayers borrowing in personal name. This higher threshold exists because of the Section 24 mortgage interest relief changes, which since April 2020 prevent individual landlords from deducting mortgage interest from rental income for tax purposes. Instead, they receive only a 20% basic-rate tax credit. For a higher-rate taxpayer, each pound of mortgage interest costs more in after-tax terms, meaning the same rental income provides less real financial buffer. Lenders require the larger 145% margin to account for this additional tax burden.
The reason lenders apply a stricter 145% ICR to higher-rate taxpayers is rooted in the Section 24 changes, see our mortgage interest relief definition for the full background. This distinction means a higher-rate taxpayer with identical rent and loan figures to a basic-rate taxpayer may be unable to borrow the same amount, or may need to find a lender with a more flexible approach.
Limited companies can deduct mortgage interest as a business expense before corporation tax, giving each pound of interest the same economic weight as for a basic-rate taxpayer. This is one reason many higher-rate taxpayers have moved to limited company structures for new buy-to-let purchases.
A worked example
A landlord (higher-rate taxpayer, personal name) wants to borrow £200,000. The lender's stress rate is 5.5%. Stressed annual interest = £200,000 × 5.5% = £11,000. With a 145% ICR requirement, the minimum annual rent needed is: £11,000 × 1.45 = £15,950, or approximately £1,329 per month. If the achievable market rent is only £1,200 per month (£14,400 annually), the ICR falls short at 130.9%, below the 145% threshold. Options include reducing the loan, finding a higher-yielding property, using a lender with a lower stress rate, exploring top-slicing (see below), or restructuring via a limited company.
Use our buy-to-let mortgage calculator to model how different loan amounts and stress rates interact with the ICR thresholds.
Portfolio landlord rules
Portfolio landlords, those with four or more mortgaged buy-to-let properties, face additional underwriting under the PRA's portfolio landlord criteria. Lenders must assess the resilience of the entire portfolio, not just the property being purchased or remortgaged. In practice this means providing a property schedule with individual rents, values, loan balances, and ICR calculations for each property; demonstrating that the portfolio as a whole meets the ICR threshold at a stressed rate; and sometimes providing three years of tax returns to verify rental income and existing commitments.
From working with self-managing landlords across the UK, August finds that the portfolio landlord assessment is where ICR exposure most often catches landlords off guard, a property that appears to pass in isolation may drag the portfolio ICR below threshold when combined with properties in lower-yield locations or with higher LTV positions.
What to do if ICR is too low
If a property fails the ICR test, the most common routes are:
Reduce the loan amount by increasing the deposit, which lowers the stressed interest cost and improves the ratio.
Choose a five-year-plus fixed-rate product, which allows the lender to apply a lower stress rate under the PRA framework.
Select a lender with a lower stress rate or ICR threshold, specialist buy-to-let lenders often apply more flexible criteria than high-street banks.
Use top-slicing, where the lender assesses surplus personal income as additional support for the mortgage. Not all lenders offer this; it is most relevant for higher-value London and South East purchases where yields are lower relative to property prices.
Consider a limited company structure, which resets the ICR threshold to 125% and allows full mortgage interest deductibility, though this involves CGT and SDLT implications on transfer and should only be done with professional tax advice.
The Renters' Rights Act backdrop
The Renters' Rights Act changes the cashflow risk environment within which ICR stress-testing operates. With Section 21 abolished since May 2026 and most tenancies becoming open-ended periodic tenancies, possession, where it is needed, relies on Section 8 notice and specific grounds for possession. Court timelines for possession proceedings on rent arrears grounds remain long. This does not change ICR calculations directly, but it does change the practical downside scenario that the stressed ICR is meant to protect against, a landlord cannot as easily end a tenancy and reset cashflows if problems arise. Building a larger rent-to-interest buffer than the minimum ICR threshold, rather than targeting the minimum, is therefore prudent risk management in the post-RRA environment.
Frequently asked questions
What is a good interest coverage ratio for a buy-to-let?
Any ICR above the lender's minimum threshold qualifies for a mortgage, but a ratio above 145% for higher-rate taxpayers (or 145% for basic-rate as a rule of thumb) provides meaningful headroom against voids, rent arrears, and future interest rate rises. An ICR of 175% or more suggests the property has strong rental coverage relative to its loan; below 130% the margin is thin, especially for higher-rate taxpayers.
Why do higher-rate taxpayers face a 145% ICR instead of 125%?
Because Section 24 of the Finance Act 2015 (phased in from 2017 and fully in force from April 2020) removed the ability of individual landlords to deduct mortgage interest from rental income for tax purposes. Higher-rate taxpayers receive only a 20% basic-rate tax credit on mortgage interest, meaning each pound of interest costs more in after-tax terms than for a basic-rate taxpayer or limited company. The 145% ICR compensates for this tax burden by requiring a wider income margin over the stressed interest cost.
Does a five-year-fix avoid the stressed interest rate?
Not entirely, but PRA SS13/16 allows lenders to apply a lower stress rate for mortgage products fixed for five years or more. Many lenders stress five-year fixes at the product rate rather than 5.5%, which can materially increase the maximum loan a given rent supports. This makes five-year fixes attractive for higher-LTV purchases where rent struggles to meet the full 5.5% stressed ICR.
