ICR means Interest Coverage Ratio. In the world of investing in real estate, it is an important ratio that a real estate finance advisor and the chosen lender look at when assessing an application.
Interest Coverage Ratio (ICR)
The ICR is a measure of the extent to which a consumer or professional real estate investor is able to pay the interest of the buy-to-let mortgage on the outstanding mortgage sum based on rental income. Most lenders look at the market rent for this and not at the actual rent realized. For responsible property financing, it is important that the costs of property financing can also be paid in the event of the sudden disappearance of the current tenant.
Interest coverage by income
The ICR indicates how often you can pay the interest on the relevant financing with the proceeds that come into the bank account of the real estate investor. With an ICR of 2, the proceeds are enough to pay 2 times the interest due. When the ICR falls below 1, an investor or entrepreneur can no longer pay the interest due from the cash flow and the risk score is below par. Most providers use a lower limit of 1.25. It is sometimes possible to deviate from this on the basis of a good, numerical substantiation. The acceptance guidelines and financing frameworks for investing in regular homes and apartments can differ from, for example, commercial real estate, room rental properties or the rental to international personnel (migrant workers).
Lower ICR due to higher interest rates
When interest rates rise or rental income falls, this key figure deteriorates. If interest rates rise, interest costs will increase. A reduction in the rent obviously does not have a positive effect on the financial side of an investment. For both reasons, a business case for a real estate investment can turn out negative.