Top slicing is a term associated with buy to let mortgages. It’s not for everyone though, so here we answer some of the most commonly asked questions about this topic for would-be landlords.
What is buy to let (BTL) top slicing?
If you’ve got this far, you’re probably already aware that buy to let mortgages are not quite the same as standard residential mortgages; these are mortgages where the property won’t be lived in by the borrower but instead will be let out to tenants. The rates and terms for buy to let mortgages can therefore be quite different because lenders must account for the possibility that a property may not be let for all 365 days a year.
With a residential mortgage, a homeowner obviously needs to show that they can afford their monthly repayments but with buy to let, mortgage lenders need to be sure that the income a landlord generates from a property is in excess of the mortgage payments.
Just how much this excess is, is worked out in a calculation known as the Interest Coverage Ratio or ICR for short. In some cases, a landlord may not be able to set the rent on their property at a level to meet this ICR requirement, which is where top slicing comes in.
Top slicing allows lenders to take into account other sources of personal income when deciding whether to lend to a potential landlord. So for example, if the landlord has another source of income such as a salary from a separate job, this could ‘top up’ any lack of rental income on the property.
In this situation, lenders will normally assess an individual’s outgoings too, to ensure there is sufficient surplus income. Some lenders may take into account other forms of income (such as disability benefits or pension income) as long as these are regular payments received on an ongoing basis and can be guaranteed into the future.
How did top slicing come about?
There were two factors that lead to top slicing being introduced in the UK.
Firstly, due to fears that buy to let landlords were pushing up prices for first time buyers, a raft of tax changes were announced by the then Chancellor, George Osborne, in 2015, to be phased in from 2017 through until 2020. These had the result of making buy to let a less attractive proposition.
Secondly, stricter affordability rules were introduced in 2017 which set the Interest Coverage Ratio (ICR) at between 125 and 145 per cent, and this stress test extended to ensuring the landlord could afford the repayments should interest rates rise.
These measures put a real pressure on landlords’ profits, meaning fewer new landlords entered the market and some existing landlords decided there wasn’t enough financial gain to continue.
However, lenders could see that in some cases, this new regulation was preventing them from lending to wealthy or experienced landlords, many of whom could meet the ICR, if they were allowed to use other forms of income to top up their rental income. Hence top slicing was born.
Who might benefit from top slicing?
Top slicing is only suitable for those who are certain that the supplementary income they intend to use to cover any rental shortfalls is sufficient and reliable enough in the short, medium and long term. It’s not enough to cobble together a few savings here and there to cover the odd month if a property falls vacant, for example. All lenders will want to ensure that the additional sources of income are regular and consistent.
Top slicing is usually suitable for medium to high earners who have minimal debts. Retired people with a sizable pension income may also be eligible for top slicing.
Top slicing may also appeal to those looking to purchase a property in an area with higher than average property prices, as they may not be able to set rents at a level to meet ICR criteria.
Who isn’t it for?
In short, landlords who are scraping together the finances to buy a property or those with any doubts about their future income.
Becoming a landlord is not the one-way ticket to wealth or the risk-free pension investment that some once thought it was. As well as the financial admin, finding and retaining suitable tenants requires effort, as does maintaining the property itself. If buying-to-let feels like a stretch or a burden, it probably isn’t the right route.
At the other end of the scale, landlords with multiple properties (i.e. four or more, commonly known as ‘portfolio’ landlords) may find it more difficult to access top slicing. Even if the landlord has surplus rental income from other properties, the lender will probably want to evaluate the entire portfolio to feel comfortable with the levels of risk involved.
Which lenders offer buy to let top slicing?
Top slicing is becoming more mainstream and therefore increasing numbers of mortgage lenders will consider alternative sources of income to meet their ICR.
Lenders that review each and every case on a manual lending basis are often a good place to start as they will consider the merits of each application individually. Lenders who have a more computer-based approach to lending are less likely to accept landlords who need to consider top slicing when arranging their mortgage.
Top slicing is a great tool for the right landlord but it should certainly not be seen as a loophole for those whose finances are tightly stretched already.
If in doubt, seek the expert advice of a mortgage broker. They will have thorough and up-to-date knowledge about which lenders are currently offering top slicing and who might be best to approach with a specific set of borrowing needs.
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