BUY TO LET INCOME COVERAGE RATIO CALCULATION

WHAT IS INTEREST COVERAGE RATIO AND WHAT EFFECT WILL IT HAVE ON MY BUY TO LET BORROWING?

Background

The Interest Coverage Ratio (ICR), which was previously calculated at 125%, is changing as a result of the buy to let tax changes which were announced in July 2015. The changes will have a material impact on the size of loan available to you.

All buy to let lenders require that the rental income covers the mortgage payment plus a margin to cover other costs. The calculation used varies from lender to lender and even from product to product. Until recently the general rule of thumb was that the rent needed to cover the mortgage payment by 125% assuming a notional interest rate of circa 5%, i.e. 125% @ 5%, regardless of the actual rate you pay. Increasing costs for landlords who borrow personally (such as the restrictions on interest relief) have led many lenders to increase the interest cover ratio (ICR).

What Are ICR Rates changing to?

  • Base rate tax payer - 125%

  • High rate tax payer - 145%

  • Additional rate tax payer - 160%

  • Limited Company - 125%

  • Bespoke - 125-160%

How to Calculate The Amount You Can Borrow On a Buy to Let Mortgage

 

The first thing to bear in mind is that Lenders perceive a buy to let mortgage as a self funding commercial business proposition with the rental income covering the loan repayments.

 

Buy to lets are an “off the shelf product” very similar to residential mortgages, but are not regulated under the Financial Conduct Authority in the same way and do not normally require your personal income to cover the loan repayments. This is how property investors are able build a portfolio of properties without having to stop when they run out of personal income to service the mortgage repayments.

Here are some industry phrases that lenders use to assess the maximum loan amount on a property:

Max LTV – Maximum Loan to Value - This is the percentage of the purchase price or property value (whichever is the lower) that the loan amount must not exceed.

Rental Income – The monthly rental income a property should achieve as assessed on a valuation survey

Interest Cover Ratio – This is the percentage by which the monthly rental income of the property must exceed the monthly interest only payments. This ratio is calculated based on your personal tax margin.

Pay Rate – The interest rate applied to the mortgage to calculate monthly payments

Notional Rate – An alternative to the pay rate used by lenders to assess maximum borrowing. This is normally where the pay rate is considered to be significantly below the rate you would pay after the initial promotional rate expires.

Stress Testing – This is how lenders use the above information to assess the amount you can borrow.

Now for the basic calculations:

Maximum Loan amount based on monthly rental income:

Rental income x 12 (for annual rent) divided by the Pay or Notional rate % divided by the Interest Cover Ratio (ICR)%

Cautionary note:

Although the rental income should exceed the monthly interest only mortgage payments there are obviously going to be further costs over and above the deposit required such as maintenance, insurance, void periods, letting costs etc. Therefore even if the total amount you can borrow is not normally limited beyond the lenders stress testing and deposit required, you should keep a reasonable percentage of your investment capital back as liquid cash for security against potential unforeseen costs or interest rate rises.

What is bespoke ICR?

As a specialist broker we have access to a lender that can create a bespoke ICR which will reflect your tax position more accurately.

 

In the majority of cases, this will help you achieve the loan size that you want.

Please contact us for further details by calling 01255 440142.

THE CHANGING FACE OF BUY TO LET TAXATION

If you are a current landlord or are purchasing buy to let property you need to be abreast of the incoming changes to the taxation of buy to let property.

Call us now on 01255 440142 and speak with one of our specialist mortgage advisers

BUY TO LET MORTGAGE?

With massive changes to the lending criteria surrounding buy to let mortgage applications, it's the right time to talk to the experts.

Call us now on 01255 440142 and speak with one of our specialist mortgage advisers

DO YOU OWN 4 PROPERTIES OR MORE?

Changes in lender criteria assesses those landlords with 4 or more distinct mortgaged properties as Portfolio Landlords. 

Call us now on 01255 440142 and speak with one of our specialist mortgage advisers about how this affects you.

© 2019 BY MORTGAGE321

Legals

 

Think carefully before securing other debts against your home. Your home may be repossessed if you do not keep up repayments on a mortgage or other debts secured against it. 

**The Financial Conduct Authority do not regulate some forms of buy to let mortgages and commercial mortgages.

 

Mortgage321 is a trading style of Matthew Christopher Pigrome who is an appointed representative of Ingard Financial Limited which is authorised and regulated by the Financial Conduct Authority No 450731. DPA number Z1704032. 

*Source Trigold June 2019

The Financial Ombudsman Service is available to sort out individual complaints that clients and financial services businesses aren't able to resolve themselves. To contact the Financial Ombudsman Service please visit www.financial-ombudsman.org.uk

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The guidance and/or advice contained in this website is subject to the UK regulatory regime and is therefore restricted to consumers based in the UK.

Our Fees

 

Our fee structure is based mainly on three decisions; the loan amount, the complexity of your borrowing needs and whether we are arranging the mortgage for you or providing an advice-only service.

We do not charge a fee unless your decide to go ahead with our advice.

​We will charge a fee of approximately 0.5% of the loan for residential mortgage advice. Where cases are complex or involve a restricted access to credit, we estimate that the fee will be 1% of the loan, with £200.00 of this fee payable at the time of application to the lender.