Top Slicing Mortgage
Hiren Varvadekar and Jack Tarrant explain how top slicing works to improve your mortgage options.
Podcast approved by The Openwork Partnership on 30/01/2024.
What is top slicing?
Top slicing is typically used for Buy to Let mortgages, and allows a borrower to use their personal income to supplement the rent and secure a larger loan.
It applies if the rental income is not enough to justify borrowing on that property, and the client is employed or self-employed with an income. After deducting outgoings and commitments, the remainder of the person’s income can potentially be used towards the borrowing on the Buy to Let property.
Who might benefit from top slicing?
The main beneficiaries would be people with a strong personal income, whose property doesn’t quite get enough rental income to meet lenders’ affordability requirements.
Perhaps someone wants to purchase a Buy to Let for a long term investment, or they want to improve the property. At the moment it might not get the rental income needed to tick all the boxes for the lender.
By proving your salary, especially if you don’t have many other outgoings, you can give the lender more confidence. If you have money spare every month, you could use that to pay the monthly mortgage payment if needed. Many people can potentially benefit from this approach.
How do you calculate top slicing?
When assessing rental income, lenders usually want a Buy to Let property to meet an ‘interest cover ratio’ or ICR. This is from 125% to 145%, depending on the borrower’s tax status.
A basic rate taxpayer would generally fit into the 125% bracket, a higher taxpayer would fit the 145% bracket. Limited companies are worked out differently. It means that the monthly rental income should be 25% or 45% higher than the monthly repayment for the Buy to Let mortgage.
If the rental income isn’t enough to cover the repayment, top slicing could be the answer. It works by supplementing the rental income from the Buy to Let property with the borrower’s personal income.
Which lenders allow top slicing?
Looking this morning on our main panel of lenders, 50% allow top slicing [podcast recorded in January 2024]. The number has grown over the last two or three years as the need for it has become more apparent. With interest rates rising, more properties struggle to meet lenders’ affordability targets.
From our panel of 30 lenders, 15 of them will look at top slicing. They have various different requirements such as a certain amount of deposit or income to qualify. Having such a competitive environment means we can find good rates for clients.
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How can top slicing help with affordability on Buy to Let cases?
Top slicing is more common in areas of the UK where property prices are high and the rental yield is relatively low – such as London and the south east. It allows people to keep their investment properties in that area by using their personal income to make up the shortfall in affordability from that rental income.
What are the advantages and disadvantages of top slicing?
As a broker we would fully cover off the pros and cons with the client. With Buy to Let, ideally your rental payment will cover the mortgage payment and any other costs related to that, such as insurance and agency fees.
If you are then relying on your earned income to repay that mortgage payment, it’s an added risk. If something happens and your earned income reduces, or you have more outgoings, your Buy to Let could become unaffordable and you might have to sell it.
Also, if you’re looking for a really speedy application process, top slicing can slow things down. There’s usually extra underwriting involved because they have to review your personal income and evidence of this. A straightforward Buy to Let application needs less scrutiny.
But top slicing allows borrowers to access a broader range of Buy to Let properties. It may allow them to actually invest in an area they couldn’t have otherwise. Perhaps a property with a high value doesn’t have sufficient rental income at the moment, but you have a future vision. You think this will be a good location in 10 years time and can get involved now.
Lenders are also offering better rates. At the moment a lot of Buy to Let borrowing is done on a five year fixed rate – people are locking at a higher interest rate. But with a two year fixed rate you have the opportunity to review your options a little bit sooner.
Generally, top slicing is a way to mitigate the tough interest rate conditions we’ve had recently. It’s good that more lenders are able to use the customer’s personal income.
What else do we need to know about top slicing?
There are lots of advantages of using a broker, particularly in exploring the deals available. In a constantly changing market, a broker will use their expertise to compare mortgages from various lenders and seek out the most competitive deals.
Things to consider with Buy to Let include the higher product fees. Some lenders do give a competitive rate but charge higher fees. Sometimes getting the best rate might not be the best option. A broker will explore all the details so that return on investment is always the top priority.
YOUR PROPERTY MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE.
You may have to pay an early repayment charge to your existing lender if you remortgage.
The Financial Conduct Authority does not regulate most Buy to Let Mortgages.
Approved by The Openwork Partnership on 30/01/2024.