The Income Cover Ratio (ICR) is a key measure used by lenders to assess affordability for Buy to Let mortgages. In simple terms, it is the ratio of the expected rental income from a property to the mortgage payments.
The ICR is calculated by dividing the expected rental income by the mortgage interest payments, plus a margin set by the lender. This margin is usually around 125% to 145% of the mortgage interest rate, and is intended to provide a buffer to ensure that the rental income is sufficient to cover the interest only mortgage payments even in the event of void periods (when the property is unoccupied) or other unexpected costs.
For example, if a landlord is applying for a Buy to Let mortgage with a mortgage interest rate of 3.5%, the lender may require an ICR of 145%, meaning that the expected rental income must be at least 145% of the mortgage interest payments. If the expected rental income is £1,000 per month, the mortgage payments cannot be more than £690 per month (i.e. £1,000 divided by 1.45).
The ICR is an important affordability measure for Buy to Let mortgages because rental income is the primary source of repayment for the mortgage. Lenders want to ensure that the rental income is sufficient to cover the mortgage payments, as well as other expenses such as maintenance costs, insurance, and taxes.
It’s worth noting that different lenders may have different ICR requirements, and the ICR may also vary depending on factors such as the type of property, the location, whether an SPV is involved and the level of risk associated with the investment.
