Glossary · UK
What is Interest Coverage Ratio (ICR)?
The percentage by which a buy-to-let property's expected rental income must exceed the mortgage interest payment, typically 125% to 145%, used by lenders to size the maximum loan available.
Full Definition
The interest coverage ratio, usually shortened to ICR (and sometimes called the rental cover ratio), is the test buy-to-let mortgage lenders use to check that a property's rental income comfortably covers the mortgage interest, providing a buffer against rate rises, void periods and maintenance costs rather than assessing the landlord's personal income in the way a residential mortgage does. Lenders typically require rental income to be at least 125% to 145% of the mortgage interest payment, with the exact figure depending on the borrower's tax status (limited company and higher-rate taxpayer landlords are usually held to a higher percentage than basic-rate individual landlords, reflecting the loss of full mortgage interest tax relief for individuals under Section 24) and the type of mortgage rate. Crucially, most lenders calculate the interest figure using a stressed notional rate, often 5.5% to 6%, rather than the actual pay rate on the mortgage, specifically so the loan remains affordable if interest rates rise significantly after completion -- this stress testing, combined with the coverage percentage, is usually the binding constraint on how much a landlord can borrow, often limiting borrowing to a lower amount than the property's loan-to-value limit alone would suggest.