How Is Interest Only Buy to Let Affordability Worked Out
Interest only buy to let affordability is worked out from the interest cover ratio, or ICR. Divide the monthly rent by the monthly interest payment. If the rent is £1,100 and the interest payment is £722, the ICR is about 1.52x, meaning the rent covers the payment one and a half times over.
Lenders do not use the product rate for this test. They apply a stressed rate, often several percentage points higher, and require the ratio to clear a minimum threshold at that stressed rate. At an 8% stress rate, the same £165,000 loan costs £1,100 a month, so £1,100 of rent gives an ICR of exactly 1.00x and would fail most lenders' minimums.
Tax changes the picture further, because mortgage interest relief for individual landlords is now given as a tax credit rather than a full deduction, which lowers net income for higher-rate taxpayers. Run the ICR at the stressed rate, after tax, before committing to a property, and keep a buffer for empty periods and repairs.
- ICR = monthly rent ÷ monthly interest payment.
- Lenders stress test at a higher rate than the product rate.
- Check the ratio after tax and with a buffer for voids and repairs.
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