Top slicing - How can I make it work for me?
- Published: Tuesday 30 March, 2021
- By: Commercial Trust
Top slicing is where a lender uses a landlord’s surplus, personal income within their affordability assessment, to cover the gap between the rental income and required loan size, where the rent alone may not be considered sufficient.
Jorden Abbs, Sales Director at Commercial Trust, discusses the pros and cons of top slicing.
What does top slicing mean?
Whilst it isn’t the most common-used term in the buy to let world, as it isn’t an option offered by all lenders, top slicing provides an opportunity to landlords whose mortgage options are limited.
Using top-slicing, landlords are able to use another income source to increase their eligibility when it comes to the amount of money they want to borrow.
This can be helpful where the rent from a property will not raise the required loan amount once the lender has ran their affordability calculation on the rental income (where the income from the property must exceed the mortgage by both the rental cover and a stress rate).
If the landlord could demonstrate that their surplus personal income was enough to cover the shortfall, this would mean a lender may offer a loan where they would not have otherwise done.
Why does top slicing exist?
In 2016 stricter affordability rules were introduced around buy to let affordability criteria.
This meant that the Interest Coverage Ratio (ICR) on a buy to let mortgage had to be between 125% and 145% to ensure that the borrowing would remain affordable despite the, then upcoming, tax changes.
Lenders saw that these changes in regulations were preventing them from lending to some landlords.
Due to this, they considered that if they were to use income from other sources, not just their rental income from the security property, they could lend based on a combination of both personal income and rental income.
Who can benefit from top slicing?
Because top slicing is an exceptional circumstance, it cannot be used by everybody who wishes to apply for a buy to let mortgage.
The additional income that is used to supplement the rent from the property must be sufficient and reliable enough for a substantial period of time.
Lenders will require proof that the additional income is consistent, regular and long-term.
Top slicing can be used by those who have surplus personal income.
Those who are retired are also eligible for top slicing.
Top slicing may not be suitable for landlords who would not be able to provide this significant income for a sustained period of time.
Lenders may not consider people whose only income is from properties, as there may be more risk associated with relying on income from this source.
Lastly, not all lenders offer top-slicing, but it is an option your mortgage advisor can consider to get you the borrowing you need.
Who offers top slicing?
As top slicing is becoming more common, more lenders are willing to consider it as a viable option to assist landlords in meeting their ICR and stress tests for affordability.
To find out whether you would be eligible for a top slicing buy to let mortgage is right for you, talk to one of our dedicated team of specialist advisors today.
They will be able to look through our panel of over 80 lenders and assist you in finding the right mortgage for your needs.
This information should not be interpreted as financial advice. Mortgage and loan rates are subject to change.