Buy to Let Mortgages – Top-slicing
Context
In 2017 the prudential regulation authority (PRA) set stricter rules & criteria for Buy to Let mortgages.
Mortgage lenders have been required to use higher interest rate stress tests when assessing Buy to Let affordability.
As a result, borrowing power for most landlords has significantly reduced on certain products.
This had led to many landlords requiring larger deposits when taking out a Buy to Let mortgage.
What’s changed?
Before the changes were made most Buy to Let lenders would generally require your rent payment to exceed your monthly interest payment by 125%, assuming a 5% interest rate.
For example, a £100,000 mortgage would require a monthly rental income of £520.83.
Fast forward to 2017, the affordability tests now requires the mortgage lenders work off an assumed rate of 5.5% and an increased stress test at 145%. A monthly rent of £665 would now be required on a £100,000 mortgage.
It’s worth mentioning that at the time of writing (02/03/2023) interest rates have experienced an unprecedented rise in interest rates and some of the assumed Rate stress tests are as high as 8.5%.
There is an exception from the PRA rules for landlords choosing a 5-year fixed rate, the stress tests on 5-year fixed rates are less stringent than on shorter term fixed rate and variable products, however they are still a lot higher than they used to be.
What is a Buy to Let top-slicing mortgage?
Since the change in regulations, many landlords have struggled to buy or re-mortgage rental properties on regular buy to let mortgages. This is because the rental figures required often do not add up.
For example, TMW (The Mortgage Works) who are Nationwide’s BTL arm currently (03/03/2023) require a rental income between £1,380 – £1,811 to secure a 75% LTV mortgage on a £250,000 property for a higher rate taxpayer.
This is un-achievable in almost all parts of the country and the landlord would need to put down significantly more deposit in this instance. These calculations change slightly over time with interest rate fluctuations.
‘Top slicing’ is where a lender considers the landlords surplus earned income as well as the rental income from the subject property.
The borrower’s personal income is used to top up any shortfall in rent which is needed for the borrower to obtain the loan amount they require.
The lender will require the borrower to compete a budget planner to determine if there is sufficient surplus income to ‘top slice’. The borrowers existing mortgage and credit commitments will be factored into the calculations.
Which lenders do top slicing Buy to let mortgages?
There are currently around a dozen or so lenders that allow top slicing, a handful of which are mainstream/high street mortgage lenders and the rest specialist lenders or less known building societies.
Barclays, Virgin & Metro are three of the more well-known lenders that allow top slicing.
What products are available on a top slicing Buy to Let mortgage?
The products available on top slicing Buy to Let mortgages are similar to those on this let Buy to Let mortgages.
There are less lenders that offer top slicing mortgages; therefore you could pay slightly more than on a regular BTL, simply because you have less choice, not that there are separate rates. If you need to use a specialist lender, the rates can be a little higher.
Another main benefit of a top slicing buy to let mortgage is that the amount you can borrow is not determined by the product you chose, or there is certainly less impact compared on a regular Buy to Let mortgage.
Many landlords on regular Buy to let mortgages have been forced into taking 5-year fixed rates because the rental coverage stress tests on 5-year fixed rates are more relaxed than on shorter term deals.
Borrowers arranging top slicing Buy to let mortgages may have more product choice compared to those on regular buy to let mortgages.
For example, due to rental stress tests you may be unable to choose a 2 or 3 year fixed on a regular Buy to Let, however you may be able to on a top slicing buy to let if you pass the lender’s affordability assessment.
Just like with regular Buy to Let mortgages, too slicing Buy to let mortgages can generally be arranged on both an interest only and capital repayment basis.
How much do I need to earn to get a top slicing mortgage?
Most top slicing Buy to let lenders require a minimum £25,000 earned income.
Because the assessment is based on your surplus income and your existing commitments are factored in, you may need to earn much more than the minimum income.
How can Strive Mortgages help?
Since the PRA’s changes to buy to let affordability regulations in 2017, arranging a Buy to let mortgage can certainly be a little less straight forward.
Having a broker like strive on your side will give you the best chance of securing the best deal and having success with your application.
We’re an independent mortgage broker in Brighton & Hove, we offer in person appointments locally and we are available for telephone appointments for customers all over the UK.
We are ranked as one best mortgage brokers in Brighton & Hove on Google.
