ICR stress test calculation, 125% vs 145% and the s.24 higher-rate adjustment
The ICR stress test assesses whether rental income covers mortgage interest at a stressed rate. ICR = Monthly Rent ÷ (Loan Amount × Stressed Rate ÷ 12). Stressed rate: typically 5.5% or higher of: (a) lender's standard stressed rate (5.5% minimum); (b) initial product rate + 2%. At 125% ICR: £200,000 mortgage; 5.5% stressed = £916.67/month; rent must be at least £1,145.84/month. At 145% ICR (HR taxpayer): rent must be at least £1,329.17/month. The 145% threshold accounts for s.24 — higher/additional rate taxpayers cannot deduct mortgage interest before income tax; they receive only a 20% basic rate credit; this increases the effective tax burden and reduces net income available to service the mortgage.
- Basic rate taxpayer or limited company: 125% ICR (most lenders); can deduct full mortgage interest effect on company tax or benefit from lower s.24 impact at basic rate
- Higher rate taxpayer: 145% ICR (most lenders) — s.24 means effective tax on gross rental income is higher; 145% ensures property is cash-flow positive after tax at stressed rates
- Top-slicing: where rent alone fails the ICR, some specialist lenders allow personal income (salary; pension; other rental) to supplement — helps where property is slightly below ICR threshold but landlord has strong personal income; document with payslips; P60; SA302
- EPC and lease requirements: many lenders require EPC D+ for new BTL applications; leasehold properties require minimum 70-85 years remaining at mortgage term end (e.g., 25-year mortgage = typically 95-110 years minimum current lease); HMO specialist products required — most standard BTL lenders do not lend on HMOs
Portfolio landlord underwriting (PRA 2017) and limited company BTL
Portfolio landlord (PRA September 2017 update to SS13/16): 4+ mortgaged BTL properties across all lenders. When approaching any lender for a new mortgage, the lender must collect full portfolio details (all properties; values; outstanding balances; rental income; mortgage payments) and stress test the entire portfolio — not just the new property. Specialist underwriting (not automated approval) required. Takes longer (2-6 weeks); requires more documentation (portfolio spreadsheet; 2-3 years accounts for companies; SA302s; asset/liability statement). Many mainstream lenders direct portfolio landlords to specialist divisions or specialist lenders (Paragon; Foundation Home Loans; Aldermore; Fleet Mortgages).
- Background portfolio stress test: even if all background properties individually pass ICR, the portfolio must collectively demonstrate sustainability — lender assesses overall portfolio ICR and financial position including all personal liabilities
- Limited company SPV BTL: 125% ICR (typically) — company deducts mortgage interest before corporation tax; no s.24 restriction; mortgage rates slightly higher (0.1-0.3% above equivalent personal BTL); personal guarantees required from directors/shareholders
- Incorporating existing portfolio into a company: SDLT (England/NI), LBTT (Scotland), LTT (Wales) triggered on transfer of properties at market value even into own company — major cost; always obtain specialist tax advice before incorporating
- Scotland/Wales/NI: same PRA regulatory framework applies to all lenders operating in UK; purchase taxes devolved (LBTT/LTT) but mortgage regulation national; regional specialist lenders available in each nation