What rental coverage ratio do buy-to-let lenders require?

Most lenders require between 125% and 145%. Basic-rate taxpayers and limited company borrowers often qualify at 125%, while higher-rate taxpayers typically need to meet a 145% ratio. The exact requirement varies by lender and product, so check with your broker.

What if my property does not meet the rental coverage ratio?

If the rental income is too low to meet the lender's ICR requirement, you have several options: increase your deposit to reduce the loan amount, find a lender with a lower ICR requirement, consider purchasing through a limited company (which may qualify for 125% instead of 145%), or look at a different property with higher rental potential.

Why do lenders stress-test buy-to-let mortgages at a higher rate?

Lenders want to ensure the property remains affordable even if interest rates rise. Buy-to-let mortgages are typically on short-term fixed rates, and the rate could be significantly higher when you remortgage. Stress-testing at 5.5% or above protects both the lender and the borrower against future rate increases.

What is a Rental Coverage Ratio? Meaning Explained

The rental coverage ratio (also called the interest coverage ratio or ICR) is a key affordability test for buy-to-let mortgages. It measures whether the expected rental income from a property is sufficient to cover the mortgage interest payments with a comfortable margin. Lenders use this ratio to ensure the landlord can service the debt even if interest rates rise or the property is vacant for a period.

Most buy-to-let lenders require a rental coverage ratio of 125% to 145%, depending on the borrower's tax status and the lender's own risk appetite. This means the monthly rent must be 125% to 145% of the monthly mortgage interest. For example, if the monthly interest payment is £1,000, the rent must be at least £1,250 (at 125%) to £1,450 (at 145%).

The calculation is typically stress-tested at a higher interest rate than the actual mortgage rate — often 5.5% or the product pay rate plus a margin, whichever is greater. This ensures the property remains viable even if interest rates increase at remortgage.

Higher-rate taxpayers usually face a stricter ratio (typically 145%) because changes to mortgage interest tax relief (Section 24) mean they can no longer deduct all mortgage interest from rental income. Basic-rate taxpayers or limited company landlords may benefit from the lower 125% requirement.

Example

Paul is considering a buy-to-let property priced at £200,000. He plans to take a 75% LTV mortgage of £150,000. His lender stress-tests at 5.5%, giving a notional annual interest cost of £8,250 (£687.50 per month). At a 145% rental coverage ratio (Paul is a higher-rate taxpayer), the property needs to achieve a minimum monthly rent of £997 (£687.50 x 145%). The local letting agent estimates rent at £1,100 per month, so the property passes the lender's ICR test.

Key Points

The rental coverage ratio ensures rent exceeds mortgage interest by a set margin
Most lenders require 125% to 145% coverage, depending on borrower tax status
The calculation is stress-tested at a higher interest rate, typically 5.5% or above
Higher-rate taxpayers usually face a stricter ratio (145%) due to Section 24 tax rules
Limited company borrowers may benefit from a lower ratio requirement (125%)