What is top slicing, and how does it work?
With interest rates remaining high, and Stamp Duty increasing for second home purchases, it's not only harder to get a buy-to-let mortgage, but also for existing landlords to remortgage onto a new deal. As a result, many landlords are leaving the market and are exploring their options, including selling.
Landlords struggling to pay their current buy-to-let mortgage, or worried about remortgaging onto a new deal, might find that top-slicing is the ideal solution. Understanding what top-slicing entails is essential for landlords facing affordability challenges.
Key takeaways
- Top slicing allows landlords to use their personal income alongside rental income to meet mortgage affordability requirements
- It's particularly useful in high-property-price areas like London and the South-East, where rental yields may be lower
- Lenders typically require an interest coverage ratio of 125% - top slicing helps bridge the gap when rental income falls short
- Not all lenders offer top slicing mortgages, and eligibility criteria can be strict
- Speaking to a mortgage advisor can help you understand which lenders and options are available to you. Discover your options for free today.
What is top slicing?
Top slicing is when mortgage lenders factor in a borrower’s rental income from a buy-to-let property alongside their personal income to secure a loan. A 'top slicing mortgage' is used when the property’s rental income isn’t enough to cover the repayments of the buy-to-let mortgage.
Top slicing is more common in areas of the UK where property prices are high compared to rental yields, such as London and the South-East. Top slicing could allow you to keep your investment property in an area like London or the South-East by using your personal income to make up the shortfall.
Struggling with buy-to-let affordability?
Top slicing could help you hold onto your investment. Discover your options and speak to an expert to see if it’s the right option for you.
Interest Coverage Ration
Interest coverage ratio (or ICR), is a metric that shows whether a borrower can pay off their debts, expressed as a percentage. It’s used for companies as an indicator of their financial health, but also individuals.
How does top slicing work?
When assessing rental income, lenders usually want buy-to-let properties to have an interest coverage ratio of 125%, meaning that the monthly rental income should be 25% higher than the monthly repayments for the buy-to-let loan.
What is the interest coverage ratio?
Interest coverage ratio (or ICR) is a metric that shows whether a borrower can pay off their debts, expressed as a percentage. It’s used for companies as an indicator of their financial health, but also for individuals.
However, if your rental income isn’t enough to cover the repayments, top slicing could be the answer. It works by supplementing the rental income from your buy-to-let property with your personal income to make up the affordability shortfall, allowing you to get a buy-to-let mortgage or remortgage onto a more affordable deal.
Top slicing is often the solution for existing landlords who need to remortgage their buy-to-let property but are struggling to pass lenders’ mortgage affordability criteria. It can also be helpful for new landlords who have purchased a buy-to-let property in areas where property prices are high relative to rental income.
Which lenders offer top slicing mortgages?
Not all lenders offer top slicing mortgages, and those that do often have strict criteria. Those who can offer this type of mortgage will assess a borrower’s income, outgoings, and credit history to calculate how much surplus income they have available to cover the rental shortfall. They’ll then look to see if this is enough to make up the gap between your current rental income and your mortgage repayments.
Because top slicing is still a niche solution, lenders that offer it may only accept certain applicants. For example, they may not accept borrowers who are first-time buyers or who are purchasing new builds.
If you are a first-time buyer or purchasing a new build, there may still be lenders who will approve you for a top-slicing mortgage. To understand what options are available to you before you apply to a specific lender, speak to an expert mortgage advisor.
Is a top slicing mortgage a good option?
Before applying for a top slicing mortgage, it’s worth seeking expert advice from a trusted mortgage advisor, like Tembo. We specialise in helping buyers and remortgagers find ways to boost their mortgage affordability, so they could buy sooner or remortgage onto a more affordable deal.
See what you could be offered today
To see what you could be offered for a Buy to Let mortgage, including top slicing options, complete your details online with us today.
