So, Specialist Lending Solutions asked its panel if top-slicing was now essential in the current portfolio buy-to-let market.
Stephen Jackson, relationship director at NM Finance, says lenders appear to be aware that higher rental calculations are limiting customer choice.
Jane Simpson, managing director at TBMC, believes top-slicing is allowing lenders to take a common-sense approach to risk.
Ying Tan, managing director of the Buy to Let Club, notes that the changes mean some landlords need to be able to use their own income to top up shortfalls.
Pressures on the buy-to-let market continue and following the introduction of changes by the PRA combined with previous increases to rental stress tests, landlords are struggling to get the loan sizes they require.
The introduction of increased stress testing for portfolio landlords has compounded the problem, with some lenders applying calculations to the whole portfolio as well as individual properties.
However, top-slicing has been of benefit to applicants that are able to top-up any shortfall in rental assessment, perhaps following a surveyor’s report on a property, with surplus income.
The clients who stand to benefit most from this strategy are obviously high earners who are looking to purchase new investment properties.
However, it is worth noting that some landlords are now struggling to remortgage their existing properties.
While some lenders have less onerous rental calculations for clients not looking to raise any additional funds, not all lenders have agreed to apply these transitionary rules.
This means clients have to either do a product transfer with their existing lender or take out a five-year product rather than a two-year option when their current deal comes up for renewal.
Lenders appear to be aware that the higher rental calculations are limiting customer choice, and while a growing number are offering a top-slicing option some will only permit this in certain circumstances.
Clients are recommended to review their options at the earliest opportunity before their current deals are due to expire.
We are now getting a clearer picture of how the new underwriting criteria is impacting professional landlords.
The challenge facing portfolio landlords is two-fold.
The first is the change to rent stress tests being applied to the property in question and some applicants are finding they are falling short of the new requirements or limited to five-year fixed rate options with more achievable rental calculations.
The second issue is the background portfolio stress tests that are also required for landlords with four or more mortgaged buy-to-lets and some experienced landlords are being refused because of their current gearing across all of their properties.
It is more difficult for portfolio landlords in today’s marketplace, however, some lenders such as Barclays and Bluestone are taking a more holistic approach to assessing affordability.
They are taking account of a landlord’s additional income sources, not just rent, as well as general income and expenditure factors.
Other lenders offering some type of rental income top-up facility include Aldermore, Axis Bank, Hinckley & Rugby, NatWest, Precise, Together and Vida Homeloans.
This provides options for landlords who may fall slightly short of the more stringent rent stress tests but otherwise have a solid case for a mortgage.
It is good to see lenders finding ways to making do-able deals work and taking a common-sense approach without compromising their overall approach to risk.
What we’ve seen in the buy-to-let market since it has come under scrutiny and been subject to changes in regulation and criteria is lenders looking for a way to respond.
This is one of the things that is so good about the sector.
While we hear about issues involving lenders not doing enough for first-time buyers or not adequately supporting small businesses, in the buy-to-let market lenders are, on the whole, very supportive of their landlords.
They have been pushed to tighten criteria and impose stricter affordability tests as a result of the Prudential Regulation Authority but at the same time, they have worked on their product ranges to help borrowers in other ways.
This has included cutting rates as much as possible and developing products for limited company landlords to suit the new landscape.
Top slicing is another example of this.
Lenders are looking at how they can assist landlords and the new rental coverage ratios imposed by most lenders will mean some landlords need to be able to use their own income to top up shortfalls. This is a sign of lenders adjusting to a changing market and we will see it become more widely adopted.