Stress tests are easing — what it means for portfolio landlords

Most buy-to-let borrowing is capped by the rent, not the property value. Lenders take the monthly rent, apply a stress rate that is usually higher than the rate you will actually pay, and check that the rent covers the stressed interest by a set margin — the interest cover ratio, or ICR. When some lenders trim either figure, landlords who have been borrowing less than they wanted can suddenly find the numbers work.

How the calculation works

The ICR is expressed as a percentage. At 125%, the annual rent must be at least 1.25 times the annual interest at the stress rate. At 145%, it must be 1.45 times. Limited-company borrowers are usually assessed at the lower figure, because the lender is not allowing for the personal tax a higher-rate taxpayer would pay on the rent. Individuals paying higher-rate tax are often assessed at the higher one.

An illustrative example

Take a flat worth £550,000, let at £2,200 a month — £26,400 a year. Assume a stress rate of 5.5%. At 145% cover, the most the rent supports is £26,400 ÷ (1.45 × 0.055), which is roughly £331,000. At 125% cover, the same rent supports roughly £384,000.

A 75% loan-to-value cap on that flat would be £412,500, so in both cases the rent is the limit, not the value. But the difference between the two outcomes is more than £50,000 of borrowing on a single property. Across a portfolio, that is the difference between a refinance that releases capital and one that only just covers the existing debt.

Why the same case gets different answers

Lenders set their own stress rates and their own ICRs, and many vary them by product: a five-year fix is often stressed at or close to its pay rate, while a two-year product is stressed well above it. Some lenders allow a "top-slice" of personal income to make up a shortfall in rent. Others treat HMOs and multi-unit blocks differently from single lets.

That is why a case which fails with one lender can pass comfortably with another, without anything about the property changing.

What to do with it

If you parked a refinance or a purchase because the rent did not cover the borrowing, it is worth running the numbers again — especially if you are buying or holding through a limited company. Have the current rent, the property value and the existing loan to hand, and check the outcome on more than one product term before deciding.