Top Slicing Mortgage
Scott West sets out how top slicing works and where it fits in the buy-to-let market.
What is top slicing?
Top slicing is a method lenders use to help landlords bridge an affordability gap. Where you have identified a property to purchase but the rental stress test does not work, it may be possible to bring your personal income into the application so the figures add up.
In effect, a portion of your personal income is used to top up the rental income, allowing the case to fit.
Who might benefit from top slicing?
It tends to suit high income landlords who want to secure properties with lower rental yields, often where there is a strong expectation of capital growth in the area.
It can also apply where a portfolio landlord wishes to expand into areas in which rents are low relative to property prices.
It can work for first-time landlords too, where personal income is strong but property prices do not support the required yield. The common factor is that the target property does not, on rent alone, meet the lender’s yield requirement.
How do you calculate top slicing?
A lender begins with a standard rental calculation, typically 125% or 145% of the mortgage payment. That is the stress test. If a property generates £800 a month in rental income but the lender’s stress test requires £1,000 a month — which is 125% — there is a £200 shortfall. That is the gap between what the lender requires and the rent you receive.
This is not necessarily the same as the mortgage payment. The lender then considers your personal income. Where there is a £200 affordability surplus, that surplus can be used to underwrite the loan, so the lending you want can proceed even though the stress test alone does not fit.
Your rental profit on this type of property will usually be slightly lower, because the margin between the rent and the mortgage payment is close. In most of these cases, though, the objective is capital growth rather than rental income.
Which lenders allow top slicing?
A handful of lenders offer top slicing; it is not widely available. The names include specialist and high-street lenders such as Precise, The Mortgage Works and Kent Reliance. Criteria and appetite change frequently, so we confirm the live options against your case rather than working from a fixed list.
How can top slicing help with affordability on buy-to-let?
Where rental income alone does not meet the affordability requirement, topping it up with your personal income can allow you to obtain the mortgage, and the property, you want, even where the case does not fit a lender’s standard criteria.
It suits borrowers looking to purchase in areas of high property values and relatively low yields. In the south and south east, and London in particular, property values are high and rents are weaker as a yield percentage. Properties of that kind are the ones that most often require top slicing.
What are the advantages and disadvantages of top slicing?
The principal advantage is that your borrowing potential is extended by taking personal income into account. You can obtain mortgages on properties that would not otherwise be affordable, which opens up high value, low yield areas.
So if you wish to buy in London but the rental income alone does not support it, sufficient surplus personal income can still allow the purchase to proceed.
The trade-off is increased personal risk: a portion of your income is now committed to the buy-to-let. The lender pool is also smaller, and the rates available will not always match those of high street lenders.
The underwriting requires detailed income and expenditure, which adds time. Depending on how complex your income is, it can extend the process by two or three weeks.
How a broker helps
Lenders that offer top slicing generally require a broker to be involved. These are broker-only products, and our role is to position your application correctly.
Some lenders will suit you better than others, depending on your income sources and how complex your income is. We help you choose the right lender, present the case well and smooth the underwriting process.
We also help you make an informed decision. A property may look like a sound investment on paper; we run it through affordability calculators and projections, and we can assist with sourcing.
Your property may be repossessed if you do not keep up with your mortgage repayments.
Most buy-to-let mortgages are not regulated by the Financial Conduct Authority.
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