Buy to let mortgage calculator

How lenders stress test a buy to let mortgage

The maximum loan on a buy to let mortgage comes from one calculation. The lender takes the annual rent, then divides it by two numbers: a stress rate and an interest cover ratio. The stress rate is a notional interest rate, usually higher than the rate you actually pay, that the lender uses to prove the rent would still cover the mortgage if rates rose. The interest cover ratio, or ICR, is the margin the rent has to clear above that stressed interest, expressed as a percentage. The formula is simply annual rent divided by the stress rate multiplied by the ICR.

Take the worked example from the calculator. A property let at 1,000 pounds a month produces 12,000 pounds of annual rent. Stress it at 5.5 percent and apply a 145 percent interest cover ratio and the maximum loan is 12,000 divided by 0.055, divided by 1.45, which is about 150,470 pounds. Drop the ICR to 125 percent, as a limited company or a basic rate taxpayer would be tested, and the same rent supports around 174,545 pounds. The rent has not changed. The test has, and that is why the way you hold the property matters as much as the property itself.

Interest cover ratio by borrower type

Lenders vary the ICR by the tax position of the borrower, because tax changes how much of the rent survives to service the loan. The common bands are:

• 125 percent for a basic rate taxpayer or a limited company. Corporate landlords deduct finance costs in full before corporation tax, so lenders accept a thinner cover.
• 145 percent for a higher rate taxpayer holding personally. Since Section 24 restricted mortgage interest relief to a 20 percent tax credit, higher rate landlords keep less of the rent, so lenders demand more cover.
• A lower stress rate on longer fixes. Many lenders stress a five year fixed rate at or near the pay rate rather than a notional higher rate, because the payment is locked. That can lift the maximum loan materially on the same rent, which is why the calculator carries a five year fix option.

Where the rent falls just short of the loan you need, some lenders allow top slicing, using surplus personal or portfolio income to bridge the gap, and a handful price on the pay rate for shorter terms. These are underwriting decisions rather than universal rules, and we place them case by case.

Worked example: a limited company purchase

Suppose you are buying a 200,000 pound property through a special purpose vehicle limited company, letting it at 1,100 pounds a month. Annual rent is 13,200 pounds. At a 5.5 percent stress rate and 125 percent ICR the rent supports about 192,000 pounds, comfortably above the 150,000 pound loan you would need at 75 percent loan to value. The binding constraint here is the 75 percent loan to value cap, not the rent, so the deal stresses with room to spare. Had you held it personally as a higher rate taxpayer at 145 percent, the same rent would support about 165,500 pounds, still clear of the 150,000 pound target but with a thinner margin. We check both the loan to value ceiling and the rental stress on every case and tell you which one bites first.

For the detail on holding through a company, see our page on limited company buy to let mortgages, and the limited company versus personal calculator to model the tax. Portfolio landlords with four or more mortgaged properties should also read portfolio mortgages and run the portfolio LTV and ICR calculator, which aggregates the stress test across the whole portfolio the way a PRA portfolio landlord is assessed.