1st November 2024
Property investment can be incredibly lucrative if you can effectively navigate the markets and find funding. One of the most popular ways to secure the funding required for property investments is through buy-to-let (BTL) mortgages. However, lenders typically apply strict income requirements and stress tests to ensure the affordability of the mortgages being offered, which can make it tough to secure your BTL mortgage. For those looking to mitigate the risk of a failed application, top slicing a financial strategy that looks to improve the chances of getting approved for a BTL mortgage. So, in this article, we'll discuss what top slicing is, how it works and more to help you understand if this approach is right for you.
Top slicing is a method used by some lenders to consider additional sources of income beyond the rental income from the property when assessing a borrower's mortgage application. This approach is particularly useful when the rental income alone does not meet the lender's required stress tests.
find me a mortgageWhen a lender calculates your ability to afford a BTL mortgage, they typically look at the rental income that the property is expected to generate. This income must cover the mortgage payments by a certain percentage, often around 125 to 145%, at an assumed interest rate, which is usually higher than the actual rate (known as a 'stress rate'). If the rental income falls short of these requirements, your application might be at risk of being declined.
Top slicing allows you to supplement the rental income calculation with other verifiable income sources - such as your salary, dividends, or other investment income - to meet the lender's requirements. This can make it easier to get approval for a mortgage or secure better borrowing terms.
There are several notable benefits associated with top slicing, so if you can make use of this strategy it can really improve your situation when looking to borrow. Some of the main benefits associated with top slicing includes:
By using additional personal income to supplement rental income, you may be able to borrow more than you would based solely on the rental income. This can be particularly advantageous in high-value markets where rental yields are lower.
Some lenders reserve their most competitive interest rates for borrowers who demonstrate greater affordability. Through top slicing, you can potentially access these better products, which might offer lower interest rates and better terms.
For established landlords looking to expand their portfolios, top slicing can provide the necessary leverage to acquire additional properties when traditional rental calculations would not allow further borrowing.
Although top slicing is useful in certain scenarios, it isn't always the best path forward. Below are a few of the potential drawbacks associated with this approach:
Utilising top slicing involves a closer examination of your personal income and financial commitments. This means you will need to disclose more financial information, which can complicate the application process.
Because top slicing relies on your personal income, it exposes you to greater financial risk. If rental income decreases or if personal circumstances change (such as job loss or reduced earnings), you might find it challenging to meet mortgage payments.
This strategy is heavily dependent on maintaining the personal income levels used in the initial mortgage application. Any significant change can affect your ability to support your mortgage in the future, potentially leading to financial strain.
Before considering top slicing, it's important to evaluate your overall financial health and ensure you have a stable and reliable income source to support this strategy. Factor in potential changes to your income and lifestyle that could impact your ability to sustain mortgage payments.
Not all lenders offer top slicing, and among those that do, criteria can vary significantly. Some might only accept certain types of supplementary income, while others may have different coverage ratios. It's important to shop around and speak to a mortgage advisor who can guide you to the right lenders, such as one of our team at WIS Mortgages.
Top slicing should be part of a broader financial strategy that includes contingency planning for changes in rental markets, personal income, and interest rates. Consider the long-term implications of using personal income to support your property investment.
Top slicing can be a valuable tool for securing a BTL mortgage, especially in challenging financial situations or competitive property markets. It allows investors to leverage their overall financial strength to meet lender requirements, potentially opening up opportunities that would otherwise be unavailable. However, it also brings additional risks and requires careful financial planning and risk management. As with any investment decision, it's advisable to consult with financial experts to understand fully how top slicing can fit into your personal investment strategy and ensure it aligns with your financial goals and capabilities.
If you would like to discuss top slicing further - or have any questions about your mortgage application - then please get in touch with our team at WIS Mortgages today for further guidance.
As a mortgage is secured against your home it may be repossessed if you do not keep up the mortgage repayments.
Contact UsA. Top slicing is a financial strategy that lets you utilise your surplus personal income to enhance your rental income and satisfy your lender's loan calculation stipulations. Lenders will look at your outgoings to effectively assess your financial status.
A. Top slicing can offer many benefits for your BTL mortgage, such as the ability to mitigate higher mortgage rates, increased borrowing potential and more control over the mortgage products you are being offered.
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