What is Top Slicing?

what is top slicingWhat is Top Slicing?

Let’s remember that the whole financial sector loves an acronym and loves a sound bite. Top Slicing sounds more like my golf game, but it is all about buy to let lending and using other income to support a shortfall in rental income.

It works where the traditional lending to rental income ratio doesn’t get you the level of borrowing you want on your buy to let mortgage.

To explain it easier let me give you an example:

Before Top Slicing

Rental Income£1,000How much the monthly rental is
Lender Income to Rental Percentage140%How much the rent needs to exceed the loan costs
Sample Interest Rate3.5%Based on the rental income, how much could you borrow
Maximum Borrowing£244,897Based on the rental income, how much could you borrow

After Top Slicing

Rental Income£1,000How much the monthly rental is
Lender Income to Rental Percentage140%How much the rent needs to exceed the loan costs
Sample Interest Rate3.5%Based on the rental income, how much could you borrow
Maximum Borrowing£244,897Based on the rental income, how much could you borrow
Borrowing You Want£300,000How much you actually wanted to borrow
Spare Income£500Either from other income or from other properties you own
Income Now Available£1,500Rent plus Spare Income
New Maximum Borrowing£367,346How much you could now borrow

This shows that by adding in surplus incomes from other sources the property investor can increase their borrowing levels where the rental income alone isn’t enough in isolation to meet lender affordability criteria.

It is often thought that every buy to let property needs to stand on it’s own in terms of affordability. Whilst ideal, it is not always the case. Top Slicing works especially well in London, South East and South West where property prices have increased faster than rentals, meaning overall rental yields have fallen.

The Benefits of Top Slicing

The benefit is that experienced landlords can leverage the spare income within their portfolio (this can include holiday lets) or spare income from other sources and use this to borrow more against their investment properties.

This works well when rental yields are lower. This can be a geographic issue or where the value of the property is higher and the average yields no longer work.

For many landlords it is not about the separate incomes on separate properties, rather it is about cash flow and the overall totals of incomes.

How to Use Top Slicing

If you have a property that you want to finance but the figures don’t quite stack up then please get in touch. There are a few considerations with top slicing of income, however, it can offer options to get the level of finance you want.

For more details then get in touch or use the form below.

By David Farmer

 

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