How Do You Calculate Rental Coverage? (Rental Income Required Calculator Included)

The amount you can borrow on a buy-to-let mortgage is currently restricted by three main criteria. The first criteria is the Loan To Value, but when you know how much you want to borrow, the two criteria to calculate mortgage rental coverage are the Stressed Mortgage Rate and Interest Rate Cover Ratio or Rent Cover.

1. Loan to value – The loan to value (LTV) is the ratio of what you borrow as a mortgage against the property’s valuation, which is the different between the purchase price less your deposit. For example, if a property is valued at £100,000 and you can borrow up to £75,000, the LTV is 75%.
2. Stressed mortgage rate – The stressed mortgage rate is used to determine if you will still be able to pay the mortgage if interest rates rise above the proposed mortgage rate at the time of borrowing. For example, the product rate for the mortgage you are applying for maybe say 3.5%, but the stressed mortgage rate might be 5.5%.
3. Interest rate cover ratio (ICR) – The interest rate cover ratio is the ratio of gross rental income to mortgage interest repayments and is affected by your highest rate of tax. Lenders use a minimum ICR of 125% for basic rate tax payers and 145% for higher rate tax payers. For example, if the stressed mortgage interest were £500 per month, the monthly rental income must be at least £625 using 125% or £725 using 145%.

How do you calculate rental income coverage?

To calculate the minimum required monthly rent for mortgage rental cover, the formula is: The Proposed Mortgage Amount * Stressed Mortgage Rate / 12 * Interest Rate Cover Ratio (ICR) = Required Monthly Rent.

But the best way to calculate rental income coverage is to use a Rental Income Required Calculator.

What is Rental Cover?

Rental cover is what monthly rent must be to cover mortgage interest payments at a stressed rate, multiplied by an interest cover ratio (ICR). ICR is currently 125% for low rate tax payers vs 145% for high rate tax payers, but this is also affected if the property is purchased in a limited company.

Standard values for rental cover are 125% for lower rate tax payers vs 145% for higher rate tax payers.

Calculating rental coverage using Rental Income Required Calculator

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Russell Bowyer

Article written by Russell Bowyer who has been investing in property since purchasing his first commercial property in the 1990's for his own Chartered Accountancy business. But his first property investment project was to turn an old dilapidated restaurant into a large 5-bed home, which he purchased for £117,500 and sold for £450,000 (to see an "after" photo of the house before it was sold see here: About). Russell owns a number of investment properties, which includes houses, flats and HMO's. More recently he has turned his creative side to investing in property using lease options. His largest lease option deal to date was to acquire 12 properties worth over £2 million for just £12, which means he paid just £1 to acquire each property!