Mortgage Solutions’ latest poll, sponsored by Bank of Ireland, asked brokers on what percentage of their BTL cases top slicing is critical to get the deal through.
The majority of brokers replied that under a quarter of their clients require top slicing, while 19 per cent of brokers said up to half of their applicants needed their income to make the deal stack up.
Only 16 per cent of those polled said that over half of their BTL deals are secured on a top slicing basis.
Top slicing is where a lender can look to use a client’s surplus personal income, so having taken into account existing residential mortgage commitments and expenditure, and can use this where there is a shortfall based on the rental income for the lenders ICR (Interest Cover Ratio) requirements.
Greg Cunnington, director of lender relationships and new homes at Alexander Hall, explained that due to regulatory requirements these ICR requirements for higher rate tax payers can be up to 145% at a rate of 5.5%.
Cunnington said: “However, with yields in London and the South East in particular at low levels currently this means without top slicing options, a lot of clients have very limited options currently.
“As an example, a lot of clients utilised the ability to ‘let to buy’ and took loans at 75% LTV on their existing properties in the last few years; most likely anticipating property value increases, that in the flat market, have not materialised and so still have loans at 75%.
“The rent covers the mortgage payments comfortably at the current low rates and these clients want to keep these properties now as long term investments, in a lot of cases looking at as a future pension pot from the rental income.
“However without top slicing these clients do not have a home. But these are clients on good incomes and with lenders using high rates of interest for their affordability calculations on the top slicing to ensure the levels offered are responsible so in my opinion as long as done correctly the lenders with options in this space are taking on good quality applicants at fairly low levels of risk.”
Top slicing ‘half way’
Cunnington said that around 25-30% Alexander Hall’s BTL completions was done on a top slicing basis last year, but with most of his clients being based in London, this is not surprising.
He added: “Our top lender was Barclays who have a very straight forward top slicing calculator with a full affordability assessment which works very well. It is great to see new lenders in this space, such as Bank of Ireland and Platform, and I expect we will see more follow this year.
“The one thing lenders should be careful of is entering top slicing ‘half way’, for instance keeping a 125% assessment. If a client needs top slicing it can be for quite a large shortfall, particularly on the larger loans, and so a 100% assessment as a minimum is required.
“Metro improved in this space last year and saw an instant uplift as a result, joining the likes of Barclays and Clydesdale – who although not technically a top slicing lender, do an income assessment with a reduced ICR requirement – to show some positive innovation in this space.”
Top slicing helps borrowers get the property they want
Frank Dyson, commercial banking relationship manager at The UK Adviser, explained that having a top slicing facility allows advisers to help the borrower get the property that they want, and maximise the return on their investment – as income may not necessarily come from the property that the finance is required on.
He added: “The method of financing is common on higher value properties, with investors focused on the South East of England and Central London most likely to use top slicing.
“An adviser wants to help their client finance their investment and achieve the best returns possible.”
An adviser uses top slicing when rental income falls
Dyson said that a borrower must be able to demonstrate that they could afford an amount greater than the monthly mortgage repayment amount – typically it is 145 per cent for individuals and 125 per cent for limited companies.
He said: “An adviser may use top slicing in situations where the rental income falls below the required repayment amount. Monthly rent payments which fall below the level of mortgage payments are more common across larger property portfolios, commercial units and city centre properties.
“An adviser would work with the borrower on their budget, incomings and outgoings, to ensure their net income is sufficient to cover the loan. This can be complex across larger portfolios.”
He also pointed out that alternatives to top slicing include products with blended rates.
He added: “These allow investors the flexibility to pay back a portion of their loan, whilst increasing the interest on the rest. This enables advisers to structure a solution that fits the required rental coverage – these products can be quite complex and an adviser would help simplify the process.”
BTL investors look at longer term fixed rates
Jonathan Harris, director of Anderson Harris, agreed with Cunnington, saying that top slicing is increasingly more prevalent as rental cover and stress testing has become tighter, particularly in central London where rental yields are lower.
He added: “There is certainly greater emphasis on it, which has not been the case in the past. In my experience, around 25 to 50 per cent of our clients investing in London require top slicing.”
However, Malcolm Fitchett, national sales director at Platinum Options, agreed with the vast majority of brokers, saying that in his experience top slicing is less than 25 per cent.
He added: “I think this is governed by BTL investors looking at longer term fixed rates whereby the ICR calculation is based on the pay rate as opposed to a nominal 5.5% rate and therefore with lower rate tax payers being assessed on as low as 125 per cent of pay rate and higher rate tax payers being assessed at 130 per cent of pay rate on five-year products the need for top slicing in the majority of cases is negated.
“Also with a growing demand for BTL purchases being in a limited company name whereby ICR calculations are based at 125 per cent, this is again lessening the demand for top slicing.”