What is an Interest Coverage Ratio (ICR)?

Definition: The Interest Coverage Ratio (ICR) is the primary affordability test used by buy-to-let and HMO mortgage lenders to determine how much they will lend. It measures how many times the property's rental income covers the mortgage interest payments, calculated as annual rental income divided by annual mortgage interest. Most HMO lenders require an ICR of 125%–145%, meaning rental income must be 25–45% higher than the interest charge. The ICR is usually assessed at a stressed rate — a notional interest rate set above the actual product rate (typically 5–5.5%) — to ensure the loan remains affordable if rates rise. For example, if an HMO mortgage interest at the stressed rate costs £15,000 per year and the lender requires a 145% ICR, the property must generate at least £21,750 in annual rental income to qualify. Lenders use different rental figures: some use actual passing rent, others apply a conservative market rent assessed by their valuer. For HMO investors, the ICR test is often the binding constraint on loan size — not LTV. Higher-yielding HMOs with rooms rented individually typically pass ICR tests more comfortably than lower-yielding single-let properties, which is one reason HMO investors can often borrow more relative to property value.