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If you’ve been approached by a client looking for a buy to let mortgage in recent years, you’ll know that securing the loan size they need is not always straightforward.

It’s not because of how much they earn, it’s because buy to let affordability is driven by the rental income generated by the property. For higher rate and additional rate taxpayers, the rental income needs to meet a higher interest coverage ratio (ICR), with the rent required to cover at least 140% of the stressed mortgage payment, compared with 125% for basic rate taxpayers and limited company landlords.

In some cases, this means the property itself may not generate enough rental income to meet the required calculation. The applicant may have a strong income profile, but when affordability is assessed on the rental asset alone, the case can still fall short.

Fortunately, there’s a solution thanks to our fantastic top slicing feature.

Top slicing allows borrowers to use their surplus disposable earned income to top up a rental shortfall where the income generated by the property is insufficient to meet the minimum rental cover requirements.

In practical terms, if the rental income doesn’t meet our standard stressed ICR calculation, but it does achieve a minimum 110% ICR when calculated using the pay rate of the selected mortgage product, we can look at how much disposable income your client has and use that to cover any shortfall.

For example, a client may be looking to purchase a buy to let property in an area where property values are high but rental yields are relatively modest. The property may have strong long-term investment potential, but the expected rental income may not quite meet the standard ICR requirement.

Without top slicing, that shortfall could limit the amount your client is able to borrow. With top slicing, we can consider whether the client has sufficient surplus disposable earned income to make up the difference between the rental income and the required rental coverage calculation.

This can be particularly useful for clients who have strong earned income but are purchasing properties where the rental yield alone doesn’t satisfy the full stress test.

Let me show you how it works.

Say you’ve got a client who works in banking. They earn a decent salary and have built a small portfolio with two buy to lets in London. They’re now looking to expand their rental operation and purchase a third property in the capital. They’ve seen a property on the market for £500,000 and they expect it to earn £1,500 rental income each month. To keep initial costs as low as possible, they’re looking to take out a 75% LTV 2 year fixed rate at 3.69%.

As they’re looking at a 2 year fixed rate, the stress rate applied is pay rate plus 2%, and as a higher rate taxpayer, they need the rental income to cover 140% of the stressed rate.

At 75% LTV, they’re looking at a £375,000 loan, but based on the rental income alone, the most they could borrow is around £226,000, so there’s a shortfall. To borrow the full loan amount, they’d actually need to achieve rental income of £2,490 a month to satisfy the full ICR.

However, our top slicing feature, which is available to non-first-time prime clients, allows eligible clients to use their surplus earned income to make up affordability shortfalls.

Whilst the estimated £1,500 rental income doesn’t cover the standard ICR, it does cover a minimum ICR of 110% when stressed at the product rate which means the case is eligible for top slicing.

After carrying out affordability checks, we can see that the client has around £1,450 disposable net income each month, which we can use to top up the shortfall and meet the 140% ICR required. It means we’re able to offer them the full £375,000 mortgage they need to purchase the property and add to their small but growing portfolio.

Sound good? You can find out more in our handy ‘Guide to top slicing’ which has full details, including information on how to access the feature, the forms of income we accept, commitments and expenditure to consider, as well as helpful submission tips.

And don’t forget, if you’ve got any other questions, you can always contact your business development manager or call us a call on 01978 803333.