Can top slicing help you make a buy-to-let mortgage more affordable?

In the current market, meeting the affordability criteria for a buy-to-let mortgage can be difficult. Because of higher interest rates, the amount owed for monthly mortgage payments has increased in many circumstances. In comparison, rental rates have had to be reduced to enable tenants cope with the high cost of living. Many lenders allow top slicing in their criteria to ensure that landlords can afford to take on new buy-to-let mortgages.

What exactly is top slicing?

When applying for a buy-to-let mortgage, the rental income for the property is used to calculate affordability. This may not be sufficient to satisfy the monthly mortgage payments, limiting how much you can borrow. As a workaround, some lenders utilise top slicing to make up the difference. This is when they add any excess personal income you may have to the rental income.

How does top slicing work?

Lenders often examine your expenses to determine the surplus required to make up the difference in rental income. The top slice of your income is the amount of disposable money you have to cover this surplus, whether earned or through your portfolio. The rental income typically required for a buy-to-let mortgage must fulfil a specified interest coverage ratio, which we’ll go over in more detail below.

How does the interest coverage ratio (ICR) work?

From a lender’s perspective, the ICR determines your ability to pay the interest on your mortgage loan. The ratio is calculated by comparing gross rental income to mortgage interest payments. Basic rate taxpayers and limited firms are normally required to have an ICR of at least 125%. For higher rate taxpayers, a minimum ICR of 145% is normally required, however some lenders require 160%. The ICR is calculated using a stressed interest rate, which takes into consideration any prospective interest rate hikes. If the ICR shows that your rental income alone is insufficient to satisfy your monthly payments, the lender can employ top slicing to add your personal income to this amount.