Top Slicing Mortgage

Hello, and this time on the Mortgage and Protection podcast, we're talking all about top slicing with Scott from Propertyze. Welcome back, Scott. Thank you for joining us again. No, thank you for having me. Looking forward to covering this one because it's a topic that we get asked about sometimes. Oh, brilliant. Yes, well, hopefully it will be useful then. A bit of mortgage jargon, and I don't think we're talking about cooking or bakery, are we, here with slicing? So let's start off with the question then for those that aren't really aware, what is top slicing? Top slicing is a method that lenders use to help landlords bridge the affordability gap. So if landlords identify a property they want to remortgage, sorry, purchase, and the rental

stresses don't work, if the applicant has enough personal income, we can supplement that into the application to make the application work. Here's the short answer. Grab some of your personal income, top up the rental, make it fit. Right, okay, which is clear there, isn't it? There we go. So let's move on to this question. You touched on it there really. Who might benefit from top slicing? So high income landlords who want to secure properties with lower rental yields, potentially they've got kind of strong capital growth expectations for an area. That could be one. Portfolio landlords looking to expand their portfolio in areas where rents are lower compared to the property prices. So again, if you're kind of a portfolio landlord targeting

capital appreciation and the yields are slightly lower in that area for the moment, first time landlords, good personal income starting out, but don't have properties that meet the yields. So that's typically where, in all circumstances, people who have properties that don't meet rental yield requirements is the short answer. But those are some examples of where it might impact somebody. Okay, brilliant. There we go. Thank you for that. Now for some numbers then, I guess, what? So how do you calculate top slicing? So lenders typically calculate top slicing. They do a normal rental calculation, which is 125 or 145% of the mortgage payment, that's their stress test. So say, as an example, property generates 800 pound a month of rental income, but the lender's stress test comes

out at a thousand pounds a month, which is be 125%, right? There's a 200 pound shortfall between what the lender wants and what you're actually getting in rental income. That's not to be confused with the mortgage payment necessarily. So what the lender can do is look at your personal income. If there's 200 pounds of affordability, surplus income in your personal, they can use that to calculate underwrite the loan and then give you the loan that you want, even though the stress test doesn't fit. It might be typically needs examples. Your rental profits will be slightly lower on a property because your margin between the rental payment and the mortgage will be quite close. But most people aren't looking

for that rental income specifically in these examples. They're looking for that capital growth. Right. Okay. Brilliant. Well, thank you for breaking that down there. Hopefully that all makes sense. So moving on to this question. So what lenders allow top slicing then? Are there many? There's a handful. Not many will offer it. So top ones are kind of precise. I think the mortgage works. BM Solutions used to, I think they might still haven't used them in a while. Keplines and there's probably a few others as well that will look at it for us. Right. Okay. Well, that's good news. And of course, all the information given in this episode is correct at the time of recording end of November, 2024. So let's continue. We've got

three questions left. How can top slicing help with affordability on buy-to-let cases? Okay. So it's kind of a little bit similar to the example I gave a moment ago, but when the rental income alone doesn't meet the affordability requirements, just topping 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. So yeah, as borrowers look into purchasing areas with high property values, but relatively low yields. So if you're buying in the South and Southeast, like London, property values are very high. Rental incomes aren't high as a yield percentage. So those sorts of properties will require top slicing more often

than not. Right. Okay. So hopefully that's clear there now. And then just to summarize really, I mean, you've covered this as well, but what are the advantages and disadvantages of top slicing? So advantages, the expansional borrowing potential, but considering personal income, so you can afford mortgages on properties that wouldn't usually be affordable. Opens doors to properties in high value, low yield areas. So if you do want to start buying in London, but rental incomes don't allow it, if you have enough surplus income, we can end up only purchasing those properties. Disadvantages, it's increased risk for you personally, because some of your income is now liable towards this, it's calculated. The smaller lender pools choose from, so your rates

won't always be as competitive as high street lenders, for example. So you've got a smaller option of lenders and products. And the underwriting process obviously requires detailed income and expenditure. So this can add a bit of time to the underwriting process. It slows down the process by two, three weeks, maybe depending on how much income and how complicated your income is. Right. Okay. Brilliant. Again, thank you for that breakdown there between the advantages and disadvantages. So just lastly then, I mean, how can a mortgage broker help here? And is there anything else we need to know? It's a standard one really. I mean, the lenders typically that do top slicing will always require a broker to be involved,

they are broker only. So you'll have to come to a broker if you want to consider top slicing. They have, so yeah, we can obviously help position it. So some lenders might be better than others, depending on your income sources, how complex your income is. We can help choose the right lender position, the case correctly, and smooth out that underwriting process. And generally, just make sure that you're making informed decisions. The property itself might be a good investment deal on paper, but if we run it through affordability calculators and projections, maybe help you with some of that sourcing too. Okay. There we go. Well, some good points to end on there. Thank you for that, Scott. Hopefully that's proved useful to

anyone listening to this. And Scott, I'm sure we'll speak to you again on the podcast soon. Perfect. Look forward to it. Thank you. Please note, 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.