Buy-to-Let Mortgage Calculator

The interest cover ratio

The interest cover ratio (ICR) compares the rent with the mortgage interest. At 125%, the monthly rent must be at least 1.25 times the monthly interest on the loan, worked out at the stress rate. At 145%, it must be 1.45 times.

This calculator offers two reference levels: 125% for basic-rate taxpayers and limited companies, and 145% for higher and additional-rate taxpayers buying in their own name. The difference reflects tax. Individual landlords cannot deduct mortgage interest from rental profit and receive a 20% tax credit instead, so a higher-rate taxpayer keeps less of each pound of rent. A company deducts interest from its profits before Corporation Tax. Each lender sets its own ratios, so choose Custom ratio to enter a figure your broker gives you.

Stress testing

Lenders do not have to test the rent at the rate you will pay. They can use a notional stress rate, so the borrowing is tested against a higher interest bill than you may face at the start. The Prudential Regulation Authority sets underwriting standards for buy-to-let lending, including the interest cover test, in supervisory statement SS13/16. Stress rates differ between lenders and products. The 5.5% default is an example: replace it with the rate your broker quotes.

Maximum loan the rent supports

Annual rent divided by the ICR multiplied by the stress rate. With the example figures, £1,300 a month is £15,600 a year. At 125% and 5.5%, each pound borrowed needs 6.875p of rent a year (1.25 × 5.5%), so the rent supports £15,600 ÷ 0.06875 = £226,909.

Loan needed, loan to value and headroom

The loan you need is the price less your deposit: 25% down on £250,000 leaves £187,500, a loan to value of 75%. The rent supports £39,409 more than that, so there is headroom. If the rent supports less than you need, the shortfall has to come from a larger deposit, a lower price, a higher achievable rent or a lender with different criteria.

Monthly rent needed for this loan runs the test backwards: £187,500 × 1.25 × 5.5% ÷ 12 = £1,074. Price the rent supports at this deposit divides the maximum loan by the share of the price you are borrowing: £226,909 ÷ 75% = £302,545.

Monthly payment

Interest-only: the loan multiplied by your product rate, divided by 12. £187,500 at 5% is £781 a month, and the full loan is still owed at the end of the term.

Repayment: the standard capital and interest formula over the term you enter. Payment = L × r ÷ (1 minus (1 + r) to the power of minus n), where L is the loan, r is the annual rate divided by 12 and n is the term in months.

Rent left after the mortgage payment is before letting fees, service charges, maintenance, voids and tax. For those, use the buy-to-let calculator and the landlord tax calculator. To see the whole purchase, including stamp duty, try the deal analyser.