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What is Interest coverage ratio (ICR)?
The interest coverage ratio (ICR) is a buy-to-let lender's test that the rent comfortably covers the mortgage interest, worked out at a stressed interest rate. It is shown as a percentage, such as 125% or 145%.
Why it matters to landlords
Lenders often ask for a higher ICR from higher rate taxpayers, because Section 24 leaves them with less after tax. Limited company borrowers frequently face a lower ratio.
The ICR, not the deposit, is often what limits how much you can borrow.
Example
At a 125% ICR and a 5.5% stress rate, a £150,000 loan needs annual interest of £8,250 covered by rent of at least £10,313, about £860 a month.