How Is The Mortgage Stress Test Calculated? (Stress Test Calculator Included)

If you are looking to buy and investment property which is a buy to let property and you want to calculate how much you could borrow, this article explains how this works and includes a mortgage stress test calculator.

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 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.
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.
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.

A mortgage stress test is calculated using the stressed mortgage rate to stress mortgage payments against monthly rent should interest rates rise. The stress test calculation takes account of interest rate cover ratio (ICR) which is 125% for basic rate tax payers or 145% for higher rate tax payers.

What is the stress test mortgage?

The mortgage stress test is used to determine you will still be able to pay the mortgage if interest rates rise above the proposed mortgage rate at the time of borrowing. The mortgage stress test is used by mortgage lenders to calculate if you qualify for a mortgage and how much you can borrow.

Stress test mortgage vs loan to value

The difference between the stress test mortgage vs the loan to value calculation is the stress test amount is calculated using a stressed mortgage rate against the proposed monthly rent, whereas the loan to value is the ratio of what you borrow as a mortgage against the property’s valuation.

Why mortgage lenders use a stressed mortgage rate?

Banks and mortgage lenders are required by the regulators to use a “stressed mortgage rate” on all mortgage application, which is to make sure that the applicants don’t borrow more than they could comfortably afford if interest rates increase in the future.

How do you work out a buy-to-let stress test?

The easiest way to work out a buy-to-let stress test is to use a buy-to-let stress test calculator. The information you need to calculate the stress test mortgage includes the proposed monthly rent, the mortgage provider’s stress test rate together with the interest cover ratio (ICR).

Stress test mortgage calculator UK

I hope you’ve enjoyed this article about how is the mortgage stress test calculated

If you’ve enjoyed this article about “how is the mortgage stress test calculate ” please share it on your favourite social media site.

Also, if you have any questions, please feel free to comment below too. Please also share any of your experiences with properties you’ve bought. Alternatively, if you need more help, please feel free to contact us on our contact us page here. Or join the discussion and ask your question in the property forum.

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!