Whether you have a single buy to let (BTL) or are a portfolio landlord, if you are considering a new purchase or refinancing an existing BTL mortgage, then each lenders’ Interest Coverage Ratio (ICR) requirements/policies will be crucial to your success.
In the current times of high interest rates, lenders have set challenging ICRs and many landlords may struggle to secure the finance that they need.
What is ICR?
As part of the mortgage approval process, lenders need to understand the borrower’s affordability. For BTL mortgages, affordability is typically assessed by looking at the ICR. Most lenders apply a formulaic approach which takes into consideration gross rental income, borrowers’ income tax bracket, monthly mortgage payments (including a potential increase in interest rates) and property maintenance costs.
Each lender will have their own ICR requirements/policies depending on:
- Type of landlord – eg portfolio/professional or ‘accidental’
- Landlord’s financial circumstances and other sources of income
- Property type – HMO, holiday let, student etc
A portfolio landlord is a borrower with four or more distinct mortgaged BTL rental properties.
Improved lender flexibility
Over the past few weeks, we have seen interest rates rise significantly and consequently landlords have found it challenging to secure their desired level of mortgage finance.
To assist landlords, some lenders have reacted by introducing new initiatives and more flexible products:
- Use of landlord’s excess non-rental income to support affordability criteria and therefore higher LTVs – ‘top slicing’;
- Lower interest rates (and hence lower ICR) on mortgage products with higher arrangement fees;
- A blended lower ICR where property is jointly owned.
Given the current economic climate, significantly increasing rent may not always be an option for landlords and hence approaching flexible lenders could provide the help needed.
In these times of uncertainty, we recommend that you/your clients review current residential BTL mortgage arrangements.
Get in touch
If you wish to discuss your/your client’s personal circumstances with a member of our team, please call us at +44 (0)20 3871 2823 or email at [email protected]