Top Slicing Mortgage

What is top slicing?

It sounds like something on the tennis court or to do with cakes, but it’s actually an affordability strategy allowed by certain lenders for investing in a rental property.

When lenders assess a Buy to Let mortgage for a client, they typically look at the affordability of the loan based on the rental income you’ll get from the tenants each month.

If the property is ‘rentally challenged,’ that rent doesn’t stack up to the degree that the lender requires. In this case, some lenders will see if the client has surplus income to support the rent. That’s top slicing.

Lenders use different levels for their stress-testing, and it depends on the type of deal and also the tax bracket you’re in. For a basic rate taxpayer, for example, the rent needs to reach 125% of the mortgage payment. For a higher rate taxpayer, it’s 145%.

At a higher income level, or if the property is a bit more risky – like a house of multiple occupancy (HMO), that stress test can be 165%.

So if the rent doesn’t stack up, theoretically you need to put in a bigger deposit or find another property – or use top slicing to make it work.

Who might benefit from top slicing?

Essentially, it can help anyone on a higher income or who, more importantly, has a good disposable income.

The lender looks at the rent required for the mortgage, but perhaps the valuer or the letting agent feels you won’t achieve that – so there is a shortfall. You might have a higher income or a good disposable income, especially if you have a very small or no personal mortgage.

If your income is sufficient for the lender, they can essentially cover the shortfall on the rent with that.

How do you calculate top slicing?

Let’s say the mortgage repayment is £2,500 a month and the rent is £2,200 – there’s a £300 shortfall. If the client has good disposable income, and £300 or more is available each month, the lender can make up the difference that way.

In theory, the rent itself should be sufficient to cover the mortgage – usually at least 25% or 45% above the mortgage. But if the client was ever called upon, they would have the disposable income to make up that shortfall.

Do many lenders allow top slicing?

Not all of them, but a number of lenders do allow this. It’s a niche proposition. Various changes took place a while ago around the tax on rental properties, and landlords lost a degree of tax efficiency around what they can offset.

In response, we’ll probably see more lenders bringing in top slicing. It’s a bit unfair to disadvantage somebody because they’re a higher rate taxpayer, so a number of lenders offer this as a solution.