How top-slicing can help with affordability on buy-to-let cases.
Buy-to-let landlords have had a tough time of things over recent years, with significant changes to regulation and taxation designed to make things more difficult for them.
The introduction of an additional 3% Stamp Duty levy on investment properties in 2016, and the gradual removal of mortgage interest relief since 2017, in particular have reduced the profitability of owning rental property.
The Prudential Regulation Authority (PRA) consequently introduced stricter affordability rules for buy-to-let lending. They did this by raising the level of stress-testing required to prove the sustainability of the requested borrowing.
One unintended consequence of the PRA's new underwriting standards for buy-to-let mortgages is affecting the ability of high income and high net-worth individuals to invest in properties, even when they are more than capable of meeting the repayments.
The mortgage industry's solution is called top-slicing.
What is top-slicing?
Top-slicing is where we'll factor in a borrower’s personal income when conducting affordability calculations, in those instances where the property's rental income doesn't sufficiently cover the mortgage repayments.
Who is top-slicing especially useful for?
Top-slicing may prove particularly useful for those buying in parts of the country where property prices are inflated, and the deposit the buyer is putting down (or the term of the mortgage they require) mean rental income won't cover the repayments based on ICR.
This makes sense for applicants of high net-worth who are comfortably able to make up the shortfall in rent, and are investing in the property eyeing a long-term increase in property value.
Our ICR requirements
We take a tiered approach to Interest Coverage Ratios, based on the applicant's rate of tax.
- Basic rate payers (and applications made by Limited companies) are assessed at 125%.
- Higher rate taxpayers are assessed at 145%.
- Additional rate taxpayers are assessed at 165%.
In the case of joint applications, we'll use the highest tax banding applicable to any of the applicants.
If the property's rental income doesn't meet the necessary ICR, that's when we'll start looking at top-slicing. We'll complete an affordability assessment to look at any additional income they have, and their other obligations.
And we're able to accept additional income from a variety of sources, including self-employment, pension income, and rental income from other properties.
What about holiday lets?
We use a different affordability calculation on holiday lets. We'll automatically top-slice and base our calculations on the applicant's total income, including up to 50% of projected holiday let income – but we'll also need to know about other secured debts, including any personal mortgage on their own home.
Provided all secured lending obligations are 50% or less of total income, the loan is considered affordable.
22nd June 2019.
Lending decisions are subject to an affordability/creditworthiness assessment.
Any property used as security, including your home, may be repossessed if you do not keep up repayments on your mortgage or any other debt secured on it.