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Top slicing in buy-to-let refers to a common tactic used by more and more lenders in today’s ever evolving market, when rental income achieved by a property is not sufficient to cover the minimum ICR (Interest Cover Ratio) for the loan amount required.
It denotes the process a lender may take where they assess a borrower’s income, as well as income from rent on the property in question, when deciding how much they will lend. When assessing the borrower’s income, they will look at outgoings and calculate how much surplus a client may have in order to cover any rental income shortfall.
This will usually require the borrower to be able to afford a sum greater than the actual monthly repayment – commonly up to 145%.
Please note: If a joint application is made, both applicant’s income may be assessed, making an application more likely to be successful.
IS BUY-TO-LET TOP SLICING A GOOD OR BAD THING?
Well, that greatly depends on how you look at it.
For medium to high earners with minimum debt, top slicing could allow them to borrow where a traditional, box-ticking approach would not. This is because top slicing concentrates on surplus income. It could also be beneficial for landlords looking to buy higher value properties which may have lower rental yields.
However, things get complicated when it comes to portfolio landlords (Portfolio Landlord). Buy-to-let landlords with four or more mortgaged properties will have their entire portfolio assessed to ensure they can withstand any rental voids, and rate or tax changes.
This could mean that a borrower falls outside the lender’s parameters and their application is therefore declined. As a result, some lenders will not consider a portfolio lender for a top-slicing deal.
Please note: Top slicing is not available to limited companies, HMOs, or first-time buyers.
So, why is buy-to-let top slicing on the rise? Well, many see it as a necessary route after the Prudential Regulations Authority (PRA) (PRA BTL Policy Statement) launched stricter guidelines for landlords in October 2017. (PRA Changes)
IS TOP SLICING RIGHT FOR YOU?
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