ICR stress tests for limited companies: the 125% advantage explained

The interest coverage ratio (ICR) is the calculation that decides how much a limited company can borrow on a buy-to-let mortgage: the property's rent must cover a set percentage, typically 125% for companies, of the mortgage interest calculated at a stressed rate, typically around 5.5%. It is the single most important number in company buy-to-let underwriting, it explains why a company can usually borrow more than a higher-rate individual on the same property, and it is the test your case has to pass before any rate matters.

This guide unpacks the test from the lender's side of the desk: where it comes from, the exact arithmetic, the company advantage, the five-year-fix lever, and what to do when the rent falls short.

What is the interest coverage ratio on a limited company buy-to-let?

Buy-to-let is assessed on the asset, not the applicant's salary. The lender asks one question: does the rent comfortably exceed the cost of servicing the debt, with room for voids, costs, tax and rate rises? The ICR is that question expressed as a formula:

Annual rent ÷ (loan × stress rate) ≥ required ICR

Rearranged into the version that matters to a borrower:

Maximum loan = annual rent ÷ (stress rate × required ICR)

For a limited company at a 5.5% stress rate and 125% cover, every £1,000 of monthly rent supports a maximum loan of £12,000 ÷ (0.055 × 1.25) = roughly £174,500. The surveyor's opinion of market rent, not the figure on the tenancy agreement, is what feeds the formula; where the two differ, the lender uses the lower.

The loan the company actually gets is the lower of two ceilings: the ICR maximum and the loan-to-value cap, 75% as the market norm, 80% from a smaller group of lenders at a premium. In high-yield areas the LTV cap binds first; in low-yield areas the ICR does, and the required deposit quietly grows beyond 25%. Our buy-to-let stress test calculator runs both ceilings against any rent and price, and our location pages show which ceiling tends to bind in which market.

Why do limited companies get 125% instead of 145%?

Because of tax, directly and explicitly. The cover percentage exists so that, after the landlord's costs and tax on the rent, the mortgage is still paid. The Prudential Regulation Authority's supervisory statement SS13/16, the document that standardised buy-to-let underwriting in 2017, requires lenders to account for the tax a borrower pays on rental income when setting affordability. The arithmetic falls out of the tax system:

• A higher-rate individual pays 40% income tax on rent with mortgage interest relief restricted to a 20% credit under Section 24. More of each rental pound goes to HMRC, so the lender demands more headroom: 145% cover is the market standard, and some lenders apply 160% to 167% for additional-rate taxpayers.
• A limited company deducts the interest in full and pays corporation tax at 19% to 25% on what remains. Less tax leakage means less headroom is needed: 125% is the standard, and it matches what basic-rate individual taxpayers receive.

So the gentler company stress test is not a marketing concession; it is the underwriting consequence of the company's better tax treatment. The same Section 24 rule that pushed higher-rate landlords' tax bills up also, through SS13/16, pushed their borrowing capacity down, a double hit that the limited company structure sidesteps on both fronts.

What stress rate do lenders actually apply?

The cover ratio is half the test; the stress rate is the other half, and it moves with the market. The conventions in 2026:

• Two-year fixes and trackers: stressed at a notional rate, typically the higher of around 5.5% and the product pay rate plus a margin (often 2%). SS13/16 sets a floor of 5.5% for the rate-rise assumption on shorter-term lending.
• Five-year fixed rates: stressed at or near the actual pay rate, because the payment is contractually fixed beyond the PRA's five-year horizon. This is the single biggest lever in the whole calculation, covered below.
• Like-for-like remortgages with no extra borrowing: many lenders apply a gentler test, since the borrower is not increasing their exposure.

Property type moves the cover requirement as well as the rate. Houses in multiple occupation and multi-unit blocks are often tested at 130% to 145% even for a company borrower, reflecting their higher running costs, while a vanilla single let sits at the standard 125%. A few lenders also load the ICR for first-time landlords or for properties with unusual tenure. The cover ratio printed on the product sheet is a starting assumption, not a universal constant, which is another reason identical cases produce different maximum loans across the panel.

Lenders publish their stress assumptions and they genuinely differ; the same case can support £20,000 to £30,000 more borrowing at one lender than another purely on the stress mechanics. Mapping that across a 100+ lender panel is a core part of how we place SPV mortgage cases.

How much more can a company borrow than a personal applicant?

Hold everything constant, £1,200 per month rent, 5.5% stress rate, and vary only the borrower:

The company supports £28,900 more loan than the same person borrowing in their own name as a higher-rate taxpayer, a 16% capacity difference from the same property and the same rent. On a £260,000 purchase that is the difference between needing a £65,000 deposit and needing £79,000, before the tax comparison is even opened. For portfolio builders the compounding effect is larger still: more leverage per property means the same capital spreads across more properties.

This is worth stating plainly because it reverses the common assumption: the limited company route is often described as the expensive one (rates run 0.20% to 0.40% higher), but on borrowing capacity it is the generous one. Whether the trade nets out in the company's favour is the tax question, which our guide to limited company buy-to-let tax works through in full.

How do five-year fixes change the calculation?

Dramatically. Because a five-year fixed payment cannot rise within the PRA's stress horizon, most lenders test it at the pay rate rather than the notional stress rate. Re-run the company case at £1,200 per month rent with a five-year fix priced at 4.99%:

• Two-year fix, stressed at 5.5%: maximum loan £209,455.
• Five-year fix, stressed at 4.99%: maximum loan £14,400 ÷ (0.0499 × 1.25) = £230,862.

The longer fix unlocks about £21,000 of additional borrowing from identical rent. This is why five-year products dominate company buy-to-let: they are not only a rate-certainty choice but a leverage tool, frequently the only product shape that lets a low-yield case reach 75% LTV at all. The trade-offs are real, early repayment charges run the length of the fix, and a five-year commitment needs to match the business plan, but the stress-test arithmetic is the reason the product exists in the volume it does.

Interest-only structure matters here too: the ICR tests interest cover, and taking the mortgage interest-only (the company buy-to-let norm) keeps actual payments aligned with what is tested while maximising cash retention. The reasoning is unpacked in our guide to limited company interest-only mortgages.

What happens when the rent fails the stress test?

An ICR shortfall is one of the most common reasons company applications are declined or, more often, approved for less than the borrower wanted; it sits alongside the structural causes in our guide to why limited company mortgage applications get declined. The case is not dead; it needs restructuring. The levers, roughly in the order we reach for them:

• Move to a five-year fix tested at pay rate, often enough on its own.
• Reduce the loan and increase the deposit, accepting a lower LTV.
• Re-evidence the rent. If the surveyor's rental figure looks light against local comparables, a broker can challenge it with evidence; sometimes the tenancy is simply under-rented and a new AST changes the input.
• Top slicing. A growing minority of lenders allow surplus personal income from the directors to plug an ICR gap, effectively blending the asset test with an income test. Criteria vary widely; this is placement work.
• Change lender. Stress rates, ICRs and rental assessments differ enough across the panel that a fail at one lender can be a comfortable pass at another.

What does not work is optimism: submitting at the ceiling with no headroom and hoping the valuer agrees. A 5% rental downgrade on a case packaged at exactly 125% cover means a reduced loan offer three weeks into the purchase. We package with margin for precisely that reason.

How are portfolio landlords stressed differently?

SS13/16 draws a line at four or more mortgaged buy-to-let properties: beyond it, the borrower is a portfolio landlord and lenders must underwrite the whole portfolio, not just the new purchase. In practice that means a portfolio schedule, business plan and cash flow on application, an aggregate ICR test across every mortgaged property (commonly 125% to 145% blended, lender by lender), and limits on overall portfolio LTV (often 65% to 75% aggregated).

The consequence: one weak property can constrain borrowing on a strong one, and conversely a strong portfolio can carry a marginal new purchase at lenders who test in aggregate. Company structures help with the housekeeping here as well, a single SPV or group holding the portfolio gives the lender one set of accounts and one schedule, and the specialist portfolio lenders price for exactly this shape. If you are at three properties heading for five, the time to structure for the portfolio rules is before the fourth purchase, not after a decline.

The stress test is mechanical, which is its virtue: it can be calculated to the pound before a case goes anywhere near a lender. Run your numbers through the stress test calculator, and if the result is tighter than you expected, that is a placement problem rather than a dead end, send us the figures and we will map them across the panel on a fee-free call.