Use this buy to let stress test calculator to find the minimum rental income needed whether you want to do:
- Any type of ICR stress test including 125%, 145% and more. (Just plug in the value you need)
- Stress testing for a higher interest rate. (plug in any value you need)
Buy to Let Stress Test Calculator (For Interest Only Mortgages) 🏠
What is the Buy to Let Stress Test?
‘Ok what if things go a bit nuts and interest rates rise a fair bit, can you still afford to pay me?’…
Thats basically what a lender is saying when it comes to a stress test.
Since 2017, changes introduced by the Prudential Regulatory Authority (PRA) have meant lenders have to apply much stricter criteria for BTL borrowers:
When it comes to affordability for buy-to-let mortgages there’s two things to consider:
- The ICR (sometimes called interest cover ratio or income cover ratio).
- Buy to let stress test interest rates
The ICR is when lenders want a minimum buffer which is normally about 125% to 145% of the mortgage payment depending on your circumstance.
It changes depending on things like tax brackets and whether you’re set up as a person or limited company, (it can go up to 170% too).
If we take the example of 125%, in this case the lender is going to take your monthly mortgage payment and multiply it by 125% to find the minimum rent that you need to achieve.
Buy to Let ICR Formula
To work out the amount of rental income needed depending on the ICR of the lender use the following formula:
- Monthly Mortgage Payment x ICR = Minimum Rental Income
Example: Buy to Let ICR
So let’s use an example with the following numbers:
- Mortgage amount = £150,000
- Mortgage term = 25 years
- Interest rate = 3.5%
- Mortgage type = Interest only
- Monthly interest-only mortgage repayment = £438
- Rental affordability interest cover ratio (ICR) of 125%
125% is the same as multiplying by 1.25 so,
Minimum rent needed = £438 x 1.25 = £547.50
So to meet your lender’s affordability standards at 125% ICR you’ll need £547.50 rental income per month in this example.
Now they’ll also do a stress test using a higher interest rate to see if you can also cover that.
Buy to Let Stress Test Formula
To work out the amount of rental income needed depending on the stress test interest rate use the following formula:
- (Mortgage amount * stress test interest rate) / 12 = minimum monthly rental income
This can vary a lot so let’s look at an actual example using a real lender.
If you look at the mortgage works minimum income criteria (as of May 2023), the stress testing interest rate goes up to either +2% above your mortgage interest rate or 5.5% (whichever is the higher amount).
Stress Test Interest Rate Example
Let’s look at an example where we use a 5.5% stress test interest rate.
- Mortgage amount = £150,000
- Mortgage term = 25 years
- Stress test Interest rate = 5.5%
- Mortgage type = Interest only
- Stress tested monthly repayment = £687
Now you can see that £547.50 under the 125% ICR scenario wouldn’t pass the 5.5% stress test here.
This could mean you don’t get approved.
You would need a minimum rental amount of £687 per month to pass the stress test for this property using the stress test interest rate of 5.5%.
Who Needs to Use the BTL Stress Tests?
Everyone does.
Don’t just look at the interest rate on your mortgage product and think it’s sunshine and rainbows.
Remember to find and plug in the stress-test values for your lender to see if you’d even be approved for the mortgage.
Finishing Up
Any time you look at properties, make sure you know the prevailing stress test rates in the market so you don’t get stung on this.
The best way to do this is to just check with the lender you use because it can differ from lender to lender.
Bookmark this page if you need to quickly refer to it to quickly stress test your property investments.