What is top slicing and how does it work?
Ever since the disastrous mini-Budget back in September 2022, mortgage affordability has been stretched. With interest rates remaining high, and the Autumn Budget increasing Stamp Duty 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, having no choice but to sell their rentals when faced with unaffordable mortgage costs.
If you’re struggling to pay your current buy-to-let mortgage, or are worried about remortgaging onto a new deal, it might be that top-slicing is the ideal solution for you. But what actually is it?
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 sufficiently cover the repayments of the buy-to-let mortgage.
Top slicing is more common in areas in the UK where property prices are high and rental yield is (relatively) low. 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.
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.
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.
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 newbie landlords who may have bought a buy-to-let property where property prices were high in comparison to the cost of rent.
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.
Should I get a top slicing mortgage?
Before you apply 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 can 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, create a free Tembo plan. We’ll show you a personalised recommendation, so you can understand what options you’re eligible for - in seconds.
