Landlords are often surprised to find that their income barely features in a buy to let decision. What matters is whether the rent covers the mortgage interest by a large enough margin, at a rate considerably higher than the one you will actually pay. Get to grips with this and you can work out your budget before you view a single property.
The calculation
Every buy to let lender applies an interest coverage ratio, or ICR. The formula is:
Two variables drive it. The ICR is the cover the lender requires — commonly 125% for basic-rate taxpayers and limited companies, and 145% for higher-rate taxpayers. The stressed rate is a notional rate used for the test, often around 5.5%, or your product rate plus 2%, whichever is higher.
Five-year fixed rates are an important exception. Because they carry less payment-shock risk, many lenders stress them at the actual product rate rather than a higher notional one — which frequently allows meaningfully more borrowing on the same rent.
Worked examples
A flat in Paisley achieving £750 a month:
| Scenario | ICR | Stress rate | Max loan |
|---|---|---|---|
| Higher-rate taxpayer, 2-year fix | 145% | 5.5% | ~£112,900 |
| Basic-rate taxpayer, 2-year fix | 125% | 5.5% | ~£130,900 |
| Limited company, 2-year fix | 125% | 5.5% | ~£130,900 |
| Higher-rate taxpayer, 5-year fix | 145% | 4.8% | ~£129,300 |
| Basic-rate taxpayer, 5-year fix | 125% | 4.8% | ~£150,000 |
Same property, same rent, same applicant — a £37,000 spread depending on tax status and product choice. This is precisely where independent advice earns its keep, because the difference is invisible on a comparison site.
Five ways to increase what you can borrow
- Take a five-year fixed rate. Frequently the single biggest lever, because of the lower stress rate applied.
- Check the rental valuation. Lenders use their surveyor's rental assessment, not your expectation. Comparable local evidence from a letting agent can be worth providing.
- Choose the right lender for your tax band. Some apply 125% to all applicants regardless of tax status.
- Consider a limited company where it suits your wider position — company applications are often stressed at 125%.
- Use top-slicing. Some lenders will use surplus personal income to bridge a rental shortfall. It is not universal, but it can rescue a borderline case.
Where Scottish properties can trip the test
Rental yields in parts of Lanarkshire and Renfrewshire are strong relative to purchase prices, which generally makes the stress test easier to pass here than in much of the south. The complications tend to be about property type rather than rent level.
Ex-local authority flats, particularly in blocks above a certain height or with deck access, are restricted by some lenders. Non-standard construction, including certain prefabricated types found across Lanarkshire, narrows the pool further. Flats above commercial premises are another common restriction. None of these prevent a purchase — they simply mean starting with lenders whose criteria fit, rather than discovering the problem after a failed valuation.
Common questions
This guide is general information, not regulated financial advice, and reflects our understanding of the rules at the date shown. Tax treatment depends on individual circumstances and may change. Your home may be repossessed if you do not keep up repayments on your mortgage. Not all buy to let mortgages are regulated by the Financial Conduct Authority.