Interest Cover Ratio (ICR) Explained: Why Is It The Most Important Calculation For Landlords

As a landlord, understanding Interest Cover Ratio (ICR) is essential for securing a buy-to-let mortgage and managing your investment effectively. Lenders use this calculation to determine whether your rental income is sufficient to cover mortgage repayments. In this guide, we explain why Interest Cover Ratio (ICR) matters and how it impacts your property investment decisions.

What Is The Interest Cover Ratio (ICR)?

Interest Cover Ratio (ICR) is a financial metric used by mortgage lenders to assess a landlord’s ability to meet interest payments on a buy-to-let mortgage. It measures the ratio of rental income to mortgage interest payments, ensuring that the rental income is sufficient to cover the loan costs.

How Is ICR Calculated?

The Interest Cover Ratio (ICR) is calculated using the following formula:

ICR = Rental Income ÷ Mortgage Interest Payments

For example, if your rental income is £1,200 per month and your mortgage interest payments are £600 per month, your ICR would be 2.0 (200%).

Examples of Rental Requirements Based on ICR

Lenders have different ICR requirements based on tax status, property type, and mortgage arrangement. Below are examples based on criteria from The Mortgage Works, updated on 1st February 2025.

1. Example: Standard Buy-to-Let for Lower Rate Taxpayers

• ICR Requirement: 125%

• Assumed Mortgage Interest Payment: £800 per month

Calculation:

• Required Rental Income: £800 × 125% = £1,000 per month

Explanation: As a lower-rate taxpayer, your rental income must be at least 125% of your monthly mortgage interest payment. In this example, with an £800 interest payment, you'd need a minimum rental income of £1,000 per month.

2. Example: Standard Buy-to-Let for Higher Rate Taxpayers

• ICR Requirement: 160%

• Assumed Mortgage Interest Payment: £800 per month

Calculation:

• Required Rental Income: £800 × 160% = £1,280 per month

Explanation: Higher-rate taxpayers face a higher ICR requirement of 160%. Therefore, with an £800 monthly interest payment, you'd need a rental income of at least £1,280 per month.

3. Example: House in Multiple Occupation (HMO) or Limited Company

• ICR Requirement: 175%

• Assumed Mortgage Interest Payment: £800 per month

Calculation:

• Required Rental Income: £800 × 175% = £1,400 per month

Explanation: For HMOs or properties owned through a limited company, lenders typically require an ICR of 175%. Thus, an £800 interest payment necessitates a rental income of at least £1,400 per month.

4. Example:Portfolio Landlords with Up to 10 Mortgaged Properties

• ICR Requirement: 145%

• Assumed Mortgage Interest Payment: £800 per month

Calculation:

• Required Rental Income: £800 × 145% = £1,160 per month

Explanation: For landlords with multiple properties, lenders may require an ICR of 145%, meaning an £800 monthly mortgage interest payment requires at least £1,160 in rental income.

ICR vs. Stress Rates

Lenders not only consider Interest Cover Ratio (ICR) when assessing buy-to-let mortgage applications but also use stress rates to ensure borrowers can withstand potential interest rate increases.

What Is a Stress Rate?

A stress rate is an assumed higher interest rate used by lenders to test affordability. Instead of using the actual mortgage rate, lenders apply a stress rate (often around 5.5% or higher) to calculate whether a landlord's rental income can still cover mortgage payments if rates rise.

ICR vs. Stress Rate Example:

• ICR Calculation: Rental income must be at least 125%-175% of the mortgage interest payment.

• Stress Rate Calculation: Lenders test whether the rental income covers mortgage repayments if rates increase to 5.5% or more.

Why Do Lenders Use Stress Rates?

• Ensures landlords can afford mortgage repayments in a rising interest rate environment.

• Helps prevent mortgage defaults if rates increase in the future.

• Encourages responsible borrowing and investment planning.

Understanding both ICR and stress rates is crucial for landlords seeking a mortgage, as these factors influence loan eligibility, deposit requirements, and interest rates.

Why Is Interest Cover Ratio (ICR) Important for Landlords?

1. Mortgage Approval Requirements

Lenders use Interest Cover Ratio (ICR) as a key factor when approving buy-to-let mortgage applications. Typically, lenders require an ICR of 125% to 145%, depending on the borrower’s tax status and financial situation.

2. Determines Loan Amount and Affordability

A higher Interest Cover Ratio (ICR) indicates that your rental income comfortably covers mortgage interest payments, allowing you to secure better loan terms and borrowing capacity.

3. Impact on Mortgage Interest Rates

Lenders may offer more competitive interest rates to landlords with a strong ICR, as it reduces the risk of missed mortgage payments.

How to Improve Your Interest Cover Ratio (ICR)

1. Increase Rental Income

Raising rental income by reviewing market rates, improving property amenities, or targeting higher-paying tenants can improve your Interest Cover Ratio (ICR).

2. Reduce Mortgage Costs

Securing a mortgage with a lower interest rate through refinancing or negotiating with lenders can positively impact your ICR.

3. Lower Loan-to-Value (LTV) Ratio

A lower LTV ratio means reduced borrowing, which leads to lower interest payments and a stronger ICR. A larger deposit can help achieve this.

Get Expert Advice on Buy-to-Let Mortgages

Understanding your Interest Cover Ratio (ICR) is crucial when applying for a buy-to-let mortgage. Our team at Possible Mortgages can help assess your ICR and find the best mortgage deals tailored to your investment goals. Visit our Contact Us page to speak with a mortgage expert today.

For more landlord insights, explore our Knowledge Hub.

Your property may be repossessed if you do not keep up repayments on your mortgage. Not all Buy to Let Mortgages are regulated by The Financial Conduct Authority.