When applying for a new mortgage or remortgaging an existing property, many lenders, especially the mainstream lenders will stress test all existing properties to ensure that they fit within certain lending criteria parameters. The purpose for this is to reduce their overall risk and ensure that a portfolio landlord is not overstretched. There are different ways of stress testing a portfolio and that a basic level they will look at an overall loan to value (LTV) not exceeding a certain level. A more detailed and stringent stress test involves an interest cover ratio (ICR).
What is the Interest Cover Ratio (ICR)?
Interest rates are at an all-time low and when lenders look at an existing portfolio they stress test the portfolio using a higher interest rate than most people will be paying. By doing this, they ensure that the rental income will be sufficient to cover future interest rate rises. The vast majority of lenders will use an interest rate of 4.5% to 5.5% and then stress this at a ratio of 125% to 145% of the resulting payment. If these ratios are not met, many lenders will decline the application irrespective of the relevant property perhaps fitting the lender criteria.
How to check what is your portfolio ICR level with Lendlord?
1. Login to Lendlord platform. If you’re not already an existing user, signup free today
2. Go to “Portfolio Management” screen and start adding your property details. Make sure you enter the data for: Property Value, Current Mortgage Balance, Rental Income, Monthly Mortgage Cost:
3. After you have entered all your properties (we know, it takes time, but you just need to do it once and just keep updating the data if something changes) click on the button: “Criteria Summary”
4. In the Criteria Summary screen you will see the results of the stress test on your portfolio by reviewing the ICR figure on different rates.
You can see what is your portfolio ICR for each rate (4%, 4.5%, 5% and 5.5%)
5. If you didn’t meet the ICR criteria for some lenders you will see it on the screen (we currently support only 22 lenders but we’re expanding the list):
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