A flat lets for £1,250 a month. The buy-to-let lender requires rent of at least 125% of the interest, calculated at a stressed rate of 5%. Ignoring LTV, what is the largest interest-only loan the rent supports?
Annual rent: £1,250 × 12 = £15,000. Maximum annual interest: £15,000 ÷ 1.25 = £12,000. Maximum loan: £12,000 ÷ 5% = £240,000 (lender's interest cover test; PRA Supervisory Statement SS13/16 sets the underwriting standards). £300,000 skips the 125% cover, £375,000 multiplies instead of dividing by 1.25, and £192,000 divides by 1.25 twice.
Multiplying by the cover ratio instead of dividing.
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