An Introduction to Top Slicing Buy-to-Let Mortgages

A top slicing mortgage is a specialized financial product designed for buy-to-let investors, allowing them to bridge any shortfall in rental income to meet lender affordability criteria. Buy-to-let mortgage applications are partly assessed based on the rental income from the property in question, which should comfortably cover the mortgage payments. Usually, this is expected to be a minimum of 125% to 145% of monthly payments. However, in some cases, particularly with high value properties or in areas where rental yields are low, the rental income may fall short of such lender requirements. This is where top slicing comes in.

Top slicing allows a borrower to use their personal income, in addition to the rental income from the property, to secure a buy-to-let mortgage. This option can be attractive to investors with additional disposable income who want to purchase a buy-to-let property but face challenges meeting strict rental income criteria.

How Does Top Slicing Work?

In a standard buy-to-let mortgage, lenders use a method called Interest Coverage Ratio (ICR) to assess affordability. The ICR measures how well the rental income covers the monthly mortgage interest payment. For example, if a lender requires an ICR of 145% and the monthly interest on a mortgage is £1,000 per month, the rental income may need to be at least £1,450 per month to qualify for the loan.

If the rental income does not meet this threshold, the lender may offer a top slicing mortgage. In this case, the borrower’s personal income is used to “top up” the shortfall, ensuring that the loan remains affordable. Lenders will also look at the borrower’s wider financial circumstances - such as their salary, investments, savings, expenses and other debt commitments - to calculate whether they can afford to cover any gaps.

Example of a Top Slicing Mortgage

Consider an investor purchasing a property worth £300,000 with an interest-only buy-to-let mortgage of £200,000, requiring a monthly interest payment of £1,000. Assume the lender’s ICR is set at 145%, so the required rental income would be £1,450 per month. If the actual rental income is only £1,100, there’s a shortfall of £350 per month. With a top slicing mortgage, the lender will check if the investor has sufficient personal income to make up the difference.

In this case, if the investor has a secure salary or additional income from other sources, the lender may allow the shortfall to be covered by this income. Such flexibility opens up more opportunities for investors in areas where rental yields are not as high but property values are significant.

Which Lenders Offer Top Slicing Mortgages?

Top slicing mortgages are not available through every lender. However, several well-known lenders have introduced these products in response to the challenges buy-to-let investors face with stricter lending criteria. Here are some of the key lenders offering top slicing mortgages:

1. The Mortgage Works (TMW) – TMW, a part of Nationwide, offers top slicing mortgages to experienced landlords. They allow top slicing for borrowers who can demonstrate strong personal income, making it easier to meet their affordability criteria for buy-to-let properties.

2. Precise Mortgages – One of the pioneers in the top slicing mortgage space, Precise Mortgages has developed a robust range of buy-to-let products, including top slicing options. They allow personal income to supplement rental income, making it easier for borrowers with modest rental yields to secure finance.

3. Kensington Mortgages – Kensington Mortgages also offers top slicing products, allowing landlords to use their personal income to boost their affordability. They cater particularly to those with complex income structures, such as self-employed individuals or contractors.

4. Vida Homeloans – Vida Homeloans provides top slicing for both first-time landlords and portfolio landlords. This makes it a suitable option for a broad range of investors who might not meet the standard rental income criteria.

Each lender has its own criteria for offering top slicing. While some lenders may only allow it for experienced landlords with significant property portfolios, others are more flexible, allowing newer landlords or those with a single property to benefit. It is important to review each lender’s policies or work with a broker to identify the best fit for your circumstances.

Pros and Cons of Top Slicing Mortgages

Pros

1. Increased Property Options: Top slicing gives buy-to-let investors the ability to purchase properties in areas with lower rental yields. This means investors can buy in high-demand or high-value areas where rental income might not traditionally cover mortgage payments.

2. Affordability Flexibility: By using personal income, borrowers can meet lenders’ affordability criteria when the rental income is insufficient. This can be beneficial for high-net-worth individuals or those with diverse income sources.

3. Enhanced Investment Opportunities: Landlords who might otherwise be restricted to properties that meet strict rental yield requirements have more freedom to expand their portfolios. This could lead to higher long term capital appreciation in areas with strong growth potential, even if short term rental yields are lower.

Cons

1. Increased Financial Risk: Using personal income to supplement mortgage payments introduces additional financial risk. If rental income drops or personal circumstances change, such as a job loss or reduction in salary, the borrower may struggle to cover the mortgage payments.

2. Stricter Income Checks: Lenders offering top slicing products will scrutinise personal income and outgoings closely. This means borrowers need to demonstrate a stable and sufficient level of disposable income to support their mortgage application.

3. Limited Lender Availability: While top slicing is growing in popularity, it is still not offered by all lenders. This could limit your options and you may need to work with a mortgage broker to find a suitable lender.

Should You Get a Top Slicing Mortgage?

Whether or not you should get a top slicing mortgage depends on your personal financial situation and investment strategy. Below are some key factors to consider before deciding if this type of mortgage is right for you.

Your Personal Financial Situation

Top slicing can be beneficial if you have a high and stable income, allowing you to supplement rental income shortfalls comfortably. If your financial situation is secure, using a top slicing mortgage could enable you to invest in properties that offer long term capital growth even if they do not generate strong rental yields.

However, it is crucial to consider the risks. Using your personal income to cover mortgage payments means that you will be relying on both rental and personal income streams. If one of these income sources is disrupted, it could strain your finances.

Property Investment Strategy

Top slicing can be a useful tool for investors looking to buy in prime locations where property values are high but rental yields may be comparatively low. These areas often provide strong capital appreciation potential, which could offset lower rental yields, over time.

For investors focused solely on rental income, however, top slicing may not be the best option. If your goal is to achieve strong cash flow from the outset, properties that rely on personal income to meet affordability criteria might not align with your investment strategy.

Conclusion

A top slicing mortgage offers a solution for buy-to-let investors who may not meet traditional rental income requirements but have strong personal income streams. It provides flexibility, allowing investors to purchase properties with low rental yields but potentially benefitting from high capital appreciation.

However, with this flexibility comes additional risk. Investors need to assess their financial stability and long term investment goals carefully before opting for a top slicing mortgage. If used wisely, it can be a valuable tool to expand property portfolios and capitalise on investment opportunities that might otherwise be out of reach.  

Always consider seeking advice from a mortgage broker or financial advisor to ensure that a top slicing mortgage aligns with your financial circumstances and investment strategy.

FAQS:

1. What is a top slicing mortgage?

A top slicing mortgage is a type of buy-to-let mortgage that allows investors to use their personal income to cover any shortfall in rental income required to meet a lender's affordability criteria. It is designed to help those whose rental income alone may not meet the lender's interest coverage ratio (ICR) but have sufficient personal income to support mortgage payments.

2. How does top slicing work for buy-to-let properties?

Top slicing works by allowing lenders to consider both the rental income from the property and the borrower’s personal income when assessing mortgage affordability. If the rental income falls short of the lender’s required interest coverage ratio, the borrower’s personal income can be used to "top up" the difference, ensuring that they can still qualify for the mortgage.

3. Which lenders offer top slicing mortgages in the UK?

Several UK lenders offer top slicing mortgages, including:

• The Mortgage Works (TMW)

• Precise Mortgages

• Kensington Mortgages

• Vida Homeloans  

These lenders allow personal income to supplement rental income when calculating affordability for buy-to-let loans, but criteria may vary depending on the lender.

4. Who should consider a top slicing mortgage?

A top slicing mortgage is ideal for buy-to-let investors who have strong personal income but may not meet traditional rental income requirements for a mortgage. It is suitable for high-net-worth individuals or those looking to invest in areas where rental yields are low but property values are high. Investors should have stable and secure personal finances, as they will be relying on both rental and personal income to cover mortgage payments.

5. What are the risks of getting a top slicing mortgage?

The main risk of a top slicing mortgage is the reliance on personal income to cover any rental income shortfalls. If your personal income decreases or your rental income drops, you could face financial strain. There is also the risk of becoming over-leveraged if you take on a property that is not generating enough income to cover most of the mortgage payment.

6. Is top slicing allowed for first-time landlords?

Yes, some lenders offer top slicing mortgages to first-time landlords, but this can vary by lender. For example, Vida Homeloans provides top slicing options for both first-time landlords and portfolio landlords. However, each lender will have specific requirements, so it is advisable to check or consult with a mortgage broker.

Sources:

How Higher Earners Can Borrow More on Buy to Let Mortgages Through Top Slicing | Advias

Top slicing BTL applications is a ‘game-changer’ | FtAdvisor | Published Sept 2023