You have found a flat, the rent looks like it comfortably beats the mortgage payment, so you assume the lender will hand over the loan you asked for. Then the offer comes back tens of thousands lower. Nine times out of ten the culprit is the interest coverage ratio, or ICR, the single calculation that decides how much a buy-to-let lender will advance against a given rent.
Here is what ICR is, how the 125%, 145% and 165% thresholds map to different landlords, and how to run the sum backwards so you know your maximum loan before you make an offer.
What ICR actually measures
ICR is the ratio between the annual rent a property produces and the annual mortgage interest at a rate the lender chooses for the test. Written as a formula:
ICR = annual rent / annual mortgage interest (at the stress rate)
A lender that wants an ICR of 145% is saying the rent must be at least 145% of the interest bill. Put another way, for every £100 of interest, the property has to bring in £145 of rent. The gap is the lender's safety margin for void periods, maintenance, letting fees and the risk that rates move against you.
Two things drive the answer: the threshold percentage (how much cover the lender wants) and the stress rate (the interest rate they test at, which is usually higher than the rate you will actually pay).
The stress rate: the bit people forget
Since 2017 the Prudential Regulation Authority has required buy-to-let lenders to underwrite affordability at a stressed, or notional, interest rate rather than the headline pay rate (Bank of England supervisory statement SS13/16, bankofengland.co.uk). In practice most lenders test at around 5.5%, or the product rate plus 2%, whichever is higher.
There is one important carve-out. Where you fix for five years or more, the PRA lets lenders apply a gentler stress, often close to the actual pay rate. That is why a five-year fix frequently allows a larger loan than a two-year deal on the same rent.
125% vs 145% vs 165%: which one applies to you
The threshold a lender uses depends mostly on your tax position and the type of let, because Section 24 restricts mortgage-interest relief to a 20% basic-rate tax credit for individuals, so higher-rate taxpayers keep less of their rent after tax. Companies still deduct interest in full. Typical bands at the time of writing (July 2026):
| Threshold | Who it usually applies to |
|---|---|
| 125% | Limited company borrowers and basic-rate taxpayers |
| 145% | Higher-rate and additional-rate individual taxpayers |
| 160-170% | HMOs, multi-unit blocks and some specialist or holiday lets |
These are conventions, not law. Each lender sets its own numbers, and a few use 125% for company applications regardless of the director's personal tax band, which is one reason so many landlords now buy through a limited company.
Working backwards: from rent to a maximum loan
You can rearrange the ICR sum to get the figure that actually matters, the maximum loan:
Maximum loan = (annual rent / ICR) / stress rate
Worked example. Say the property rents for £1,200 a month, which is £14,400 a year, and the lender stresses at 5.5%.
Step 1, find the interest the rent can support: £14,400 / 1.45 = £9,931 a year (using the 145% higher-rate threshold).
Step 2, turn that into a loan: £9,931 / 0.055 = £180,563.
So a higher-rate landlord could borrow roughly £180,500 against that rent. Run the same rent through the other thresholds and the spread is stark:
| Borrower | ICR | Stress rate | Maximum loan |
|---|---|---|---|
| Basic-rate / company | 125% | 5.5% | £209,450 |
| Higher-rate | 145% | 5.5% | £180,560 |
| HMO | 165% | 5.5% | £158,680 |
| Higher-rate, 5-yr fix | 145% | 5.0% | £198,620 |
Same £14,400 of rent, and the amount a lender will advance swings by more than £50,000 depending on the threshold and stress rate. Notice the last row: dropping the stress from 5.5% to 5.0% by fixing for five years lifts the higher-rate borrower's loan by about £18,000 on the same rent.
Check your own numbers before you offer
Before you commit to a purchase, it is worth running your target rent, tax band and likely stress rate through the maths so the lender's offer does not surprise you. Padlord's mortgage stress test does exactly this, letting you flex the threshold and stress rate to see the loan each combination supports. If the number comes back short, you know before you have paid for a valuation.
Giving yourself more headroom
If your ICR falls short of the loan you need, a few levers can help:
- Fix for five years or longer, which usually triggers the lower stress rate.
- Put down a bigger deposit so the loan you need drops below the ICR ceiling.
- Consider a limited company structure, which many lenders assess at 125% (take advice on whether the wider running costs are worth it).
- Look at lenders that offer top-slicing, where provable personal income can plug a rental shortfall.
- Push the rent, honestly. An extra £50 a month of achievable rent, evidenced by the valuer, feeds straight into the calculation.
The bottom line
ICR is not a bank formality, it is the ceiling on your borrowing. Know your threshold, know the stress rate, and work the sum backwards from rent to loan before you fall for a property your mortgage will not fully cover. The rent has to do the heavy lifting, and the lender decides how hard it must work.
This is general information, not tax or financial advice. Lender criteria and stress rates change, so confirm the current figures with a broker or the lender before you rely on them.
