Buy-To-Let Rental Stress Tests

Affordability for a buy-to-let mortgage is not one size fits all. Buy-To-Let stress tests differ from lender to lender, resulting in big differences in borrowing.

Our guide will help you understand how to maximise your potential loan amount and how rental income will be stressed.

Call us – 01604 212879

Save £100’s – We’ll never charge a broker fee

    Speak To A Buy To Let Expert

    • Expert buy-to-let mortgage advice 
    • We’ll cover all lenders stress testing requirements
    • Access to thousands of BTL rates and ‘pay rate’ stress testing. 

    Consent to contact you back (required)

    Home 9 buy-to-let-mortgages 9 buy-to-let-rental-stress-tests

    Maximise your buy to let borrowing with the best rental stress tests

    Lend Invest Logo
    Shawbrook Bank Logo
    The Mortgage Lender Logo
    Precise Mortgages Logo
    Barclays Bank Logo
    Yorkshire Building Society Logo
    Lend Invest Logo
    Shawbrook Bank Logo
    The Mortgage Lender Logo
    Precise Mortgages Logo
    Barclays Bank Logo
    Yorkshire Building Society Logo

    and many more…

    What is a buy-to-let stress test?

    A stress test is a calculation that all buy-to-let mortgage lenders apply to rental income to understand if the income would still be sufficient to cover any mortgage payment in the event of interest rate increases.

    As a landlord, it’s important to understand how stress testing works because you’ll need to know how much you can borrow. If you are a portfolio landlord, lenders will also stress test your other properties before agreeing to any new loan.

    woman reading a guide leaning against a large red book

    Buy To Let Stress Testing

    Author: Darren Ferguson – Mortgage Specialist & Owner

    Published: 10th November 2023

    Read Time

    Read Time – Approximately 5 Minutes

    How does buy-to-let stress testing work?

    There are two key factors when a lender ‘stresses’ the rental income. The primary factor is the ‘interest coverage ratio’ or ‘ICR’ for short. The secondary factor is the ‘stress interest rate’ the lender applies.

    Interest Coverage Ratio (ICR)

    The ICR is the amount by which the rental income needs to cover the stressed mortgage payment. Typically, it will need to cover 125% to 145% of the payment, so if the mortgage payment is £1000pm, then the rental income will need to be a minimum of £1250 to £1450, dependent upon the ICR required.

    What determines the ICR?

    Two factors determine the ICR:

    • Firstly, whether an individual or a limited company owns the property.
    • Secondly, your tax status. However, this only applies to personal property ownership, not property owned by a limited company.

    For property owned in a limited company – the ICR will normally be 125%, however, it could be higher if the property is a HMO or Multi-Unit Block.

    For property owned personally – the ICR will be 125% if you are a basic rate taxpayer and 140% to 145% if you are a higher rate taxpayer (subject to lender). If you are an additional rate taxpayer, then the ICR with some lenders could be as high as 165%.

    Basic rate taxpayers should note that some lenders will take the gross rental income from a new property to be purchased and add this to your earned income. If this rental income then takes you into the higher rate tax threshold, then the ICR applied will be 145%, for example:

     

    • The current basic rate of tax threshold is up to £50,270 (as of 2023)
    • Applicant earns £45,000 per annum, so is a basic rate taxpayer
    • Rental income from the new property is £8000 per annum.
    • The lender will add the total gross amount of £8000 to the applicant’s earned income of £45,000, pushing them into the higher rate threshold and applying an ICR of 145%.

    The Stress Rate

    The stress rate applied to the calculation is determined by the type of product and the interest rate selected.

    5-year or more fixed rates – typically, if a 5-year fixed rate is selected, then the ‘stress’ rate used will be the actual 5-year fixed applied for. When the stress rate applied is the same as the product applied for, this is known as the ‘pay rate’. 5-year fixed rates will typically allow for a greater level of borrowing than compared to other product types.

    Non 5-year or more fixed products – If the product applied for is anything other than a 5-year or more fixed rate, the stress rate will typically be higher than the rate applied for.

    Once you understand which stress rate and ICR will be applied you can then calculate how much you can borrow.

    laptop with man using loud speaker asking for subscribers

    Example of a lender’s stress testing criteria

    The image below from one of our lenders shows the stress testing criteria that a typical lender might apply to the rental income for a buy-to-let property.

    Precise Mortgages ICR

    Points to note:

    5-year or more fixed rates – this confirms that the stress rate applied will be the initial rate the applicant applies for, known as the ‘pay rate’

    For all other product types – the stress rate applied will be a ‘nominal’ rate, which they currently have at 5.5%, or the initial rate applied for plus a margin of 1.55%, whichever is higher. For example, if the applicant has applied for a 2-year fixed rate at 5%, then the stress rate applied will be 6.55%, as this is the higher rate.

    Call us on 01604 212879 for a no obligation buy to let mortgage review

    Are all buy to let lenders stress tests the same?

    No, unfortunately not. All lenders will have their own individual stress tests. Here is a further example of how criteria can differ.

    table showing interest coverage ratio percentage
    table showing lenders buy to stress rate percentages

    You’ll see from the images above there can also be further factors for consideration that some lenders will apply when stress testing rental income:

     

    • Property type – if the property is an HMO or a Multi-Unit Block, this could be subject to an increased ICR.
    • Applicant Type – This particular lender also has increased ICR for individual ownership.
    • Loan Purpose – different stress rates are applied depending on whether the applicant is raising capital.

    We cannot stress enough how important it is to get advice from a buy to let advisor when assessing affordability

    Call us on 01604 212879 for a no obligation buy to let mortgage review

    How do I calculate a buy-to-let mortgage stress test?

    Once you understand what the ICR and the stress rate to be used are, then calculating a buy-to-let stress test is a simple process.

    You can use our calculator below or you can do it manually.

    Step 1 – Work out your annual rental income, let’s say, for example, £12,000 per year.

    Step 2 – Confirm the ICR to be used, let’s say its a limited company, so we’ll use 125%

    Step 3 – Confirm the stress rate to be used; let’s say we are going for a 5-year fixed @ 5.25%, so because it’s fixed for 5 years, we can use the actual rate or pay rate of 5.25%.

    Step 4To work out the maximum loan amount – take the annual rental income, and divide by the ICR, and then divide again by the stress rate, so:

    £12,000 / 125% / 5.5%, which equals a maximum borrowing amount of £174,545

    Sometimes, you might want to calculate the rental income needed to achieve the required loan amount. Let’s say, for example, you want to purchase a buy-to-let property for £300,000, with a 75% mortgage and therefore need to borrow £225,000.

    To work out what rental income would be required, you can use the same formula but switch the rental income for the loan amount and multiply instead of divide, as follows:

    £225,000 x 125% x 5.5% = £15,468.75 rent required per annum, or £1289pm.

    Buy-To-Let Stress Test Calculator

    Use this calculator to work out how much you can borrow based on the rental income, or what the rental income needs to be to achieve a specific loan amount.

    Please note – This calculator is for guidance only and to illustrate potential differences in loan amount, subject to ownership and rate type. You should always speak to an adviser to understand how much you could borrow, as other criteria may also apply.

    For the calculator to work, you need to make sure you have selected an option for all 5 fields:

    • What you wish to calculate
    • Rental Income or Loan Amount
    • Owner (ICR selection)
    • Initial Product Term
    • And finally, enter an Interest Rate

    Step 1 - Click an option to calculate

    Please select if you want to calculate the maximum loan possible based on a known rental income, or if you want to calculate what rental income would be required to achieve a certain loan amount. Then enter the rental income, or loan amount required dependent upon which option you selected.

    Step 2 - Select an ICR rate

    You’ll need to select an ICR rate. If you are buying in your personal name, then select Individual (BRT) if you are a basic rate taxpayer, or Individual (HRT) if you are a higher rate taxpayer. 

    If you are buying in a limited company, then select the limited company ICR of 125%.

    Step 3 - Select the initial product term

    You’ll need to select what type of product term you wish to calculate the stress test with. 

    If your mortgage rate is a fixed rate of 5 years or more, then select ‘5 years or more’. 

    For all other mortgage types, including fixed rates of less than 5 years, and for tracker or variable rates please select ‘less than 5 years’. 

    Step 4 - Enter The Interest Rate

    Please enter the actual rate you are applying for.

     

    Get the best buy to let mortgage

    Speak to a buy-to-let mortgage expert today, and we’ll search the market to find the best deal for you.

    We can help with:

    • Standard and Limited Company BTL purchases and remortgage
    • Portfolio refinance
    • Adverse Credit buy-to-let mortgages
    • HMO and Multi-Unit Blocks
    • Holiday-Let Mortgages
    Red circle with text saying no fees

    Expert Advice - Zero Broker Fees

    We’ll never charge a fee for our services, including our initial advice and mortgage arrangements.

    $

      Speak To A Buy-To-Let Mortgage Expert

      Call us on 01604 212879 or request a call back

      Consent to contact you back (required)

      If you'd like to keep updated with latest rates and developments

      How do I get the maximum loan amount for a buy-to-let mortgage?

      To achieve the maximum loan amount possible, the rental stress test must be based on the lowest ICR, 125%, and the lowest stress rate, likely a 5-year or more fixed rate.

      To get the lowest ICR of 125%, the property must be owned in a limited company, or if held personally, the applicant will need to be a basic rate taxpayer.

      Always bear in mind the impact that future rate increases might have on your ability to refinance a mortgage when your deal ends, especially if you have borrowed the maximum you can. Just a couple of years ago, stress tests were as low as 3% to 4%, and if you borrowed the maximum back then and are now looking to refinance, you may have to repay some of the debt to do so.

      What if the rental income is insufficient to achieve the required loan amount?

      Working with a broker that deals with the whole market is essential. If the loan doesn’t work with one lender, it doesn’t mean it won’t fit with another.

      There is no doubt that higher interest rates have caused new and existing landlords issues with affordability, but lenders are working to help with this, bringing out a range of lower-rate products that can help. The downside to some of these products is their high fees, but they are still a viable solution in some instances.

      As well as standard buy to let lenders, we work with a full range of specialist lenders that offer enhanced stress testing on their products.

      Top Slicing

      If the rental income alone is insufficient, then some lenders will now allow earned income to support the required loan amount. This is known as ‘Top Slicing’.

      Not all lenders will offer this, and those that do might have some criteria you’ll need to meet to qualify, such as minimum income level.

      Top slicing works on the basis that you can demonstrate an amount of surplus income each month from your earned income or even surplus income from existing buy-to-let properties you might own in the background.

      To find out more about Top Slicing, call us on 01604 212879.

      table shows loan amount using top slicing

      (Image shows an example of top slicing)

      Summary

      Short of speaking to every single lender, it is not easy to research loan amounts online, or what stress tests a lender will apply.

      Speaking to a qualified buy-to-let expert will speed things up, potentially avoid declined applications and could save you time and money. Call us today on 01604 212879 to see how we can help.

      Buy-To-Let Stress Test News & Updates

      26/01/2024 - Santander Reduces BTL Stress Rates

      Santander has reduced their buy-to-let stress rates, with 5-year fixed rates now stressed at 5.88%. 

      16/01/2024 - BM Solutions Improves 2-year stress test requirements

      For purhase and remortgage applications with capital raising, 2 year fixed and tracker 5.5% or pay rate + 2% 

      10/11/2023 - BM Solutions reduces stress rates

      Birmingham Midshires (BM Solutions) has reduced stress rates on all buy-to-let products, with stress rates starting at 5% or pay rate plus 0.5% (higher of) for 5-year fixed rates.

      Find out more about limited company buy to let mortgages

      Find out more about buy to let mortgages

      Read more about buy to let mortgages with bad credit

      Learn more about Interest Only Buy To Let Mortgages

      Find out more about Let-To-Buy Mortgages