The Interest Coverage Ratio (ICR) stress test
The ICR is the primary affordability mechanism for BTL remortgage applications — unlike residential mortgages (income multiples), BTL mortgages are assessed on rental income vs the mortgage payment at a stressed rate.
- ICR calculation: (monthly rent × 12) ÷ (stress rate %) ÷ ICR threshold = maximum loan. E.g. £1,000/month rent ÷ 5.5% × 12 ÷ 125% ≈ £174,500 maximum loan
- Stress rate: typically 5.5-6% regardless of the actual product rate; applied as a floor to test affordability under a rising rate scenario
- ICR threshold: 125% for basic rate taxpayers; 145% for higher rate taxpayers (reflecting Section 24 mortgage interest restrictions that reduce net rental income after tax)
- Rental income verification: current tenancy agreement; 12 months' bank statements; ARLA-qualified agent's rental valuation letter (for unlet property)
- ICR shortfall: if the maximum loan calculated is below the outstanding balance, the landlord must make a capital repayment at remortgage or accept a higher LTV (if available)
Portfolio landlord remortgage — PRA 2017 additional underwriting
Landlords with 4+ mortgaged BTL properties are 'portfolio landlords' under PRA 2017 and face more onerous underwriting when remortgaging.
- Portfolio Business Plan: schedule of all properties (address; value; outstanding mortgage; monthly rental income; monthly mortgage payment; gross yield; ICR per property)
- Aggregate ICR: lender assesses ICR across the entire portfolio, not just the property being remortgaged; cashflow-negative properties can drag down portfolio ICR
- Asset and liability statement: full personal asset and liability schedule including all properties, mortgages, and other liabilities
- Specialist portfolio lenders: Paragon, Fleet Mortgages, Foundation Home Loans, Shawbrook, Interbay — offer up to 80% LTV, accept SPV structures, dedicated portfolio underwriting
Product transfer vs full remortgage
At the end of a fixed-rate BTL product, landlords choose between a product transfer (existing lender; no re-underwriting) or a full remortgage (new lender; full underwriting).
- Product transfer: faster (days); cheaper (no valuation/legal fees); no re-underwriting — available even where ICR would not pass on full remortgage; ideal for rate-only switch without equity release
- Full remortgage: allows equity release; change from interest-only to capital repayment; access products not available on product transfer; takes 6-12 weeks from application
- Early Repayment Charges (ERCs): typically 2-5% of outstanding loan if exiting during the fixed period; compare ERC cost against interest saving before switching early
- Timing: begin exploring options 3-6 months before product expiry; many lenders allow rate lock 3-6 months in advance
SPV limited company BTL remortgages
SPV companies accessing the BTL mortgage market face a more limited lender pool, higher rates, mandatory personal guarantees, and different ICR thresholds.
- Specialist lenders only: Paragon, Foundation Home Loans, Fleet Mortgages, Shawbrook, The Mortgage Works — rates typically 0.1-0.5% above equivalent individual BTL
- ICR threshold for SPVs: often 125% regardless of corporation tax rate (vs 145% for higher-rate individual taxpayers) — reflecting lower corporation tax rate and no Section 24 restriction
- Personal guarantees: required by virtually all SPV BTL lenders; directors/shareholders are personally liable for SPV mortgage obligations if SPV defaults
- Transferring existing BTL into SPV: treated as disposal for CGT and purchase for SDLT (including 5% surcharge); specialist tax advice essential before any portfolio incorporation