When it comes to buy to let mortgages, you might find yourself restrained by the maximum loan amount set by lenders. These loan amounts are traditionally determined by the rental income a property is expected to generate. However, if you are a high earner with surplus income, there’s a way to stretch that maximum limit: through a concept known as ‘Top Slicing.’
What is Top Slicing?
The Standard Formula
The maximum loan calculation for a buy to let mortgage generally looks something like this:
Annual Rent ÷ Rental Cover Rate ÷ Stressed Mortgage Interest Rate
Annual Rent: The yearly gross rental income from the property.
Rental Cover Rate: The minimum percentage by which the annual rent should exceed the mortgage payments. This is usually 125% for basic rate tax payers and limited companies and 145% for higher rate tax payers.
Stressed Mortgage Interest rate: A higher interest rate than the actual available mortgage rate. Typically 2% above the applicable mortgage rate to “stress” test the mortgage for future rate rises.
The Top Slicing Element
When you apply Top Slicing, you can use your surplus personal income to boost the rental income and satisfy the lender’s loan calculation requirements. Lenders take into account various outgoings such as school fees, existing mortgage payments, other buy to let mortgage commitments, loans, and other credit commitments. If your income, after these expenses, shows a surplus, then you could qualify for an enhanced buy to let mortgage.
Do All Lenders Offer Top Slicing?
Top Slicing is not universally offered across all lenders. This is a specialised area in the mortgage market, and only specific lenders have the capacity and willingness to provide this option. Since some lenders are more generous than others in their assessments, it’s vital to consult with an experienced mortgage advisor who can guide you through this nuanced process.
Is Top Slicing Available for Let to Buy Mortgages?
Good news! Top Slicing is also applicable for let to buy mortgages. If you are looking to convert your current residential property into a buy to let while purchasing a new primary residence, the surplus income can still be considered to enhance your borrowing potential.
What are the Rates Like for Top Slicing?
Interest rates for Top Slicing can vary among lenders and are generally influenced by your risk profile, the loan-to-value ratio, and other standard lending criteria. Normally, the mortgage products are exactly the same as standard Buy to Let mortgages.
Top Slicing can be an excellent tool for higher earners looking to capitalise on their additional income and invest in buy to let properties. However, due to its specialised nature, it’s crucial to consult professionals experienced in this field to guide you through the intricacies of the process.
If you’re considering leveraging Top Slicing to raise your required mortgage, don’t hesitate to reach out to experienced advisors who can provide you tailored solutions to meet your financial needs.