Interest Cover Ratio (ICR)

Interest Cover Ratio is annual rent divided by annual interest on the loan, expressed as a percentage. It is the cover ratio UK commercial mortgage lenders apply to investment property, where the property is let to a third party tenant rather than occupied by the borrower’s own business.

How it is calculated

ICR = Annual rent / Annual interest

Lenders almost always use a stressed interest figure, not the actual contract rate. The stress rate is typically the contract rate plus 1.0 to 2.0 percentage points, or a regulatory floor of 5.5 to 7.0%, whichever is higher.

What lenders want on UK investment commercial mortgages

• Prime industrial and warehousing: 140 to 150%. Long leases, strong covenants, low management drag.
• Office and mixed-use: 150 to 165%. More tenant churn risk, more capex risk.
• Secondary retail and high-street: 165 to 175%. Higher vacancy risk, more lender caution.
• Specialist (HMOs, holiday lets, semi-commercial): 175% upwards, sometimes paired with personal guarantees.

A worked broker example

An investor buying a Manchester industrial unit. Price 1.2 million, 65% LTV (780,000 loan), 5-year fix at 7.4% per annum. The lender stresses to 8.5%. Stressed annual interest is 66,300. To clear 145% ICR the rent needs to be at least 96,135 per annum. The actual contracted rent is 110,000 per annum. ICR clears comfortably at 166%.

The trap is investors quoting actual interest rather than stressed interest. At the contract 7.4% rate the same deal looks like 191% cover, which is misleading.

ICR versus DSCR

The simplest split. ICR is for income-producing investment property where the borrower is a landlord. DSCR is for owner-occupier trading businesses where the borrower’s own EBITDA pays the loan. Where a deal is genuinely hybrid (a trading owner-occupier with a partly let upper floor for example), expect a lender to test both.

See also

• Debt Service Cover Ratio (DSCR)
• Debt yield
• Stress test
• Investment commercial mortgage