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Rental Stress Tests

Rental Stress Tests

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Understanding buy-to-let rental stress tests

Rental Stress testing is used by all lenders to assess your suitability for a mortgage product. Given the current economic climate, lenders understandably want to check that you can comfortably afford the monthly payments, keeping in mind all of your other expenses plus an added margin for risk.

Knowing how this ‘stressed’ test is calculated means that you can better understand the potential for your portfolio and how much you can borrow on a given property.

Lenders generally use two major metrics to calculate your affordability for a buy to let (BTL) mortgage:

  • Interest Cover Ratio (ICR) – simply your ability to repay the interest on your mortgage
  • Rental Cover Rate – the minimum rental income needed for the property.

Typically buy to let lenders look for an ICR of between 3.5%-5.5% and a Rental Cover Rate of between 125%-145%. That being said, this will depend on a lot of factors plus with our lender access and expertise we may be able to help you secure a mortgage that is outside of these calculations, depending on your portfolio.

The Buy to Let Broker Rental Calculations

How to calculate Rental Stress Testing

We’re all unique and the same can be said about your financial potential, this is why we believe no one-click calculator can give you a definitive score for your borrowing potential.

The Buy to Let Broker Rental Stress Test Calculator

But we appreciate that you may just be looking for a ballpark figure right now, so to give you a rough idea, you can calculate the approx rental interest that you will need using this formula:

Loan amount x ICR (5.5%) = Annual Interest

So, for example, to put that into numbers,  for a loan amount of £350,000, you will need an Annual Interest of £19,250.

Knowing the Annual Interest also allows you to calculate the minimum Annual Rental Income that the lender might expect. You can calculate this with this formula:

Annual Interest x Rental Cover Rate (145%) = Minimum Annual Rental Income

Using the previous example of £350,000, this means your property would need a Minimum Annual Rental Income of £27,912.50 – approx £2326 a month.

It is widely known that Rental Stress Tests have been under much scrutiny by The Bank of England’s Prudential Regulation Authority (PRA) over the last few years, BUT our mortgage advisers can give your the latest deals tailored to your personal portfolio.

A quick and easy way to check your suitability for a particular mortgage offer is by calling us today on 08009499410 We can discuss exactly what you are looking for and can check your eligibility for a huge range of deals, saving you a whole load of time and stress in the process.

PRA Changes to Stress Testing

Rental Stress Tests have not always been this way, historically lenders were able to be a lot more flexible with their individual thresholds but due to the PRA regulation changes, introduced in 2017, and of course the harsher tax environment for personally geared landlords, lenders are now more cautious, therefore it is even more important to have expertise on your side.

What’s more, due to the stricter PRA regulations, mortgage lenders also now take into consideration your tax when assessing mortgage affordability.

Basic rate taxpayers

Typically basic taxpayers will be assessed with stressed income cover ratio of 125%.

Higher rate taxpayers

Higher taxpayers can be assessed with an ICR of 145%.

Additional rate taxpayers

Additional taxpayers may be assessed with an ICR up to 167%.

What can landlords do about rental stress testing?

As part of our pre-submission due diligence, we will always assess your mortgage affordability and ICR calculations BEFORE applying for your mortgage to ensure that it fits with the lender’s individual criteria, this saves you time, money and the potential for a dreaded decline.

But if the investment that you are considering doesn’t meet the standard threshold, it doesn’t automatically mean that your mortgage application will be refused. Here’s where we come in.

Challenging lender decisions

Through our established relationships, we can present the merits of your case to the lender, as some may consider it even if the ICR doesn't stack up.

Top Slicing may be available

We may be able to help with 'Top Slicing' - where a lender may consider other sources of income to offset the mortgage affordability on that particular property.

Portfolio Landlords

For portfolio landlords, a lender may take a holistic of the property portfolio in order to calculate the overall affordability and lending exposure.

Personalised Mortgage Expertise
At Your Fingertips

As experts in buy to let, we can help you navigate all stress test requirements and answer any buring questions you may still have. To check your eligibility or to discuss your options, get in touch today by calling 08009499410 or by requesting a callback here.

The Buy to Let Broker Tom, Louise and Matt

Feefo Platinum Trusted Service Winner 2020, 2021, 2022, 2023 & 2024! ⭑⭑⭑⭑⭑

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