Top slicing has increased in popularity and when applying for a buy to let mortgage can be a good substitution for a shortfall in rent but it doesn’t work for everyone - Portfolio Landlords, especially…
Top slicing is not new. The likes of Metro Bank and Barclays have been using it for a long time and now, as regulatory guidelines are forcing lenders to apply more onerous rental calculations, we are seeing more lenders moving into this space, so that now Vida Homeloans, Kent Reliance and Aldermore offer it too, (other lenders are available).
In buy to let world, top slicing is where a lender will take into account the borrower’s income as well as the income from rent on the subject property when a assessing how much they will lend.
To explain top slicing in a little more depth, the lender will look at the borrower’s income and expenditure, and using a calculation (which varies from lender to lender) will ascertain how much surplus income they feel the borrower has which could be used to cover the rental income shortfall.
This works really well for those who are medium to high income earners, have minimal borrowing and three or fewer buy to let mortgages. Top slicing has enabled many borrowers to reach their desired objectives, particularly when a more tick-box approach has failed them.
There is a sting in the tail, and it’s really important that landlords are aware of it. For Portfolio Landlords (those with four or more mortgaged buy to lets), lenders are required to assess the landlord’s entire portfolio and ensure that they are comfortable that the existing arrangements can withstand rental voids, interest rate rises and the tax changes.
To this end, the properties already in the portfolio are also subject to a rental calculation and so having a mortgage which relies on top slicing in the background could mean that you fall outside of the lender’s parameters.
By way of an example, some lenders will insist that each mortgaged property already in the portfolio works on a rental calculation of between 125% and 145% assuming an interest rate of 5.5%. Other lenders may need the portfolio to work in aggregate on this basis. And some lenders simply run a calculation (which they don’t share) to make sure that the numbers work for them.
So, whilst top slicing is a wonderful facility, it is wonderful only for the right landlord, i.e. those who have no intention of having four or more buy to let mortgages, or those who might use it as a temporary facility where they would be able to reduce the debt down before they make their fifth acquisition with a buy to let mortgage.
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