Stress Testing at 145% vs 125% Rental Coverage Rules

One of the biggest hurdles landlords face in 2025 is passing lender stress tests. Even if your property generates a solid rental profit, the way lenders calculate affordability can make or break a mortgage application. The key factor is whether the lender uses a 145% coverage rule (common in personal borrowing) or a 125% coverage rule (often used for limited companies). The difference can be the deciding factor in whether your application passes or fails.

What Do Stress Tests Measure?

Stress tests measure the ratio between rental income and mortgage interest payments, known as the Interest Coverage Ratio (ICR). Lenders apply a “stress rate” that is often higher than the actual mortgage rate, to check whether you could still afford repayments if interest rates rise.

Formula: Rental Income ÷ (Mortgage Interest at Stress Rate) = ICR

The Difference Between 145% and 125%

• 145% coverage – typically required when borrowing in a personal name.
• 125% coverage – often applied when borrowing through a limited company (SPV).

This difference recognises that company structures are often treated more flexibly by lenders, partly because corporation tax applies on profits rather than income tax rates on individuals.

Worked Example: Same Property, Different Outcomes

Scenario: Loan of £200,000. Product rate = 5%. Stress rate applied = 7%. Annual interest = £14,000 (£1,166 per month).

Personal borrowing (145%)
Required rent = £14,000 × 145% = £20,300 (£1,692 per month).
If the property rents for £1,500 per month, the application fails.

Limited company borrowing (125%)
Required rent = £14,000 × 125% = £17,500 (£1,458 per month).
At £1,500 per month rent, the application passes.

Just by using a different structure, the landlord qualifies with one lender but fails with another.

Why Do Lenders Use Different Rules?

• Regulation – PRA rules introduced in 2017 tightened affordability but allowed flexibility for limited company borrowing.
• Risk appetite – some lenders are more conservative and prefer higher buffers.
• Borrower type – personal borrowers may face higher tax liabilities, reducing net income, so lenders add more margin.

How This Affects Landlords in 2025

With mortgage rates still elevated compared with the pre-2022 era, many landlords are finding it difficult to pass affordability when tested at 145%. This is pushing more investors to incorporate and seek limited company mortgages, even where product rates are slightly higher, because the affordability hurdle is lower.

Case Study: A Portfolio Landlord’s Dilemma

Scenario: A landlord owned eight properties, half of which were in low-yield city centres. Personal borrowing at 145% failed on four units.

Solution: By refinancing into a limited company structure, the landlord benefited from the 125% rule, which allowed those units to pass. Although product rates were 0.5% higher, the ability to refinance avoided being stuck on expensive reversion rates.

Outcome: Portfolio cashflow improved by £9,000 annually despite slightly higher rates, because reversion costs were avoided.

Practical Tips for Landlords

• Run affordability tests using both 125% and 145% coverage assumptions before applying.
• Consider whether incorporating into an SPV would unlock better affordability outcomes.
• Where possible, increase rents to strengthen coverage ratios ahead of refinancing.
• Use five-year fixes assessed at pay rate if affordability is tight.
• Engage brokers who know which lenders apply which coverage rules.

Final Thoughts

Passing affordability is often less about rental income itself and more about the lender’s chosen stress test rules. Understanding the difference between 145% and 125% coverage, and targeting lenders accordingly, can make the difference between a declined application and a successful refinance.

Speak to Our Sponsor

Our sponsor helps landlords navigate affordability tests, identify which lenders apply 125% or 145% coverage, and structure applications to maximise borrowing potential.

Publication date: Monday, 17 November 2025