Interest coverage ratio
Interest coverage ratio (often ICR) is a lender affordability test used for buy-to-let borrowing. Put simply, it compares the expected monthly rent from a rental property with a “stressed” monthly interest payment on the mortgage, to check the rent comfortably covers the loan if rates rise. The Prudential Regulation Authority (PRA) expects firms to define ICR as the ratio of expected monthly rental income to monthly interest payments that take account of likely future interest rate increases.
If your ICR is too low, you may not be able to borrow what you want, remortgaging a rental can become harder, and your options for an interest only mortgage may narrow. Lenders commonly set a minimum coverage level which is often expressed as a percentage. The Bank of England has noted that lenders typically look for a minimum stressed ICR of around 125%, meaning rent must exceed the stressed interest cost by a margin to reflect risk and costs.
ICR is also central to portfolio landlord criteria. If you have multiple mortgaged properties, lenders usually assess the resilience of your whole portfolio, not just one flat or house, and they may ask for a portfolio schedule, including rents, values, debts, and costs, and evidence you can manage repairs and property condition. The PRA’s buy-to-let underwriting expectations sit behind this approach.
The Renters’ Rights Act in England changes the risk backdrop that sits behind ICR stress-testing. Section 21 notice is abolished, most tenancies become an open-ended periodic tenancy, and landlords must rely on Section 8 notice and specific grounds for possession where issues arise, for example, rent arrears. That can make cashflows less “resettable”, so lenders and you tend to focus more on buffers and downside scenarios.
Also see our landlord blog articles, including:
Also see our free landlord calculators:
