Top Slicing Mortgage
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Top Slicing Mortgage
Scott West explains top slicing and what this means in the Buy to Let market.
What is top slicing?
Top slicing is a method that lenders use to help landlords bridge the affordability gap. If landlords identify a property they want to purchase, and the rental stress tests don’t work, we may be able to add your personal income into the application to make it add up.
In short, we grab some of your personal income and top up the rental to make it fit.
Who might benefit from top slicing?
It’s good for high income landlords who want to secure properties with lower rental yields. They might have strong capital growth expectations for an area.
It might be that a portfolio landlord wants to expand their portfolio in areas where rents are low, compared to property prices.
It can also work for first time landlords, where they have good personal income, but property prices don’t meet the yields. It’s typically where people’s target properties don’t meet rental yield requirements.
How do you calculate top slicing?
Lenders start with a normal rental calculation, which is 125% or 145% of the mortgage payment. That’s their stress test. If a property generates £800 a month in rental income, but the lender’s stress test comes out at £1,000 a month – which is 125% – there’s a £200 shortfall. That’s the gap between what the lender wants and what you’re getting in rent.
It’s not to be confused with the mortgage payment, necessarily. The lender can then look at your personal income. If there’s a £200 affordability surplus, they can use that to underwrite the loan. That way they can give you the loan you want, even though the stress test doesn’t fit.
Typically, your rental profits will be slightly lower on this type of property because the margin between the rental payment and the mortgage will be quite close. But most people aren’t looking for that rental income in these examples – they’re looking for capital growth.
Which lenders allow top slicing?
A handful do this – not many offer it. The main ones as of today in November 2024 are Precise, The Mortgage Works, Kent Alliance and perhaps BM Solutions – although I haven’t used them in a while. Probably a few others will look at it for us too.
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How can top slicing help with affordability on Buy to Let?
When the rental income alone doesn’t meet the affordability requirements, topping it up with your personal income will allow you to get the mortgage that you want – or the property that you want – even though it doesn’t fit the lender’s standard criteria.
It suits borrowers looking to purchase in areas with high property values but relatively low yields. If you’re buying in the south and south east, and especially London, property values are very high and rents aren’t as strong as a yield percentage. Those sorts of properties will require top splicing more often than not.
What are the advantages and disadvantages of top slicing?
The main advantage is the expansion of your borrowing potential by considering personal income. You can get mortgages on properties that wouldn’t usually be affordable. It opens the doors to properties in high value, low yield areas.
So, if you want to buy in London but rental incomes don’t allow it, but you have enough surplus income, you can still purchase those properties.
A disadvantage is that this creates increased risk for you personally. Some of your income is now liable within the Buy to Let. There’s also a smaller lender pool to choose from. Your rates won’t always be as competitive as those with high street lenders, for example.
The underwriting process requires detailed income and expenditure, which can add a bit of time. It can slow down the process by two or three weeks, depending on how complex your income is.
How can a mortgage broker help here? Is there anything else we need to know?
The lenders that typically do top slicing will always require a broker to be involved. These are broker only products, where we can obviously help position your application.
Some lenders might be better for you than others, depending on your income sources and how complex your income is. We can help choose the right lender, position the case correctly and smooth out that underwriting process.
Generally, we can also ensure you’re making informed decisions. The property itself might be a good investment to you on paper, but we will run it through affordability calculators and projections, and we can help you with some of that sourcing too.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP WITH YOUR MORTGAGE REPAYMENTS.
THE FINANCIAL CONDUCT AUTHORITY DOES NOT REGULATE MOST BUY TO LET MORTGAGES.
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