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How landlords can use their income to beat new buy-to-let rules

Lenders using top-slicing to bridge income shortfalls

Landlords who own lots of properties may be able to use their personal incomes, such as their salary, investment income or pension, to get a mortgage, as new strict rules on buy-to-let borrowing kick in.

This month, the Bank of England’s Prudential Regulation Authority (PRA) began to enforce stricter stress testing for landlords with four or more mortgaged buy-to-let properties.

So far, lenders have reacted in a variety of ways – with some bringing in new underwriting systems or amending affordability criteria, and others dropping out of the market entirely.

A handful are also now offering ‘top slicing’ deals, which allow landlords with low rental yields to make up their shortfall through other income.

Here, we explain how affordability testing works and take a look at how banks are adopting the new regulations.


Interest cover ratios and affordability

Lenders must now take every property in a landlord’s portfolio into consideration when they apply to take on a new mortgage, rather than simply assessing their overall balance sheet.

When landlords apply for additional borrowing, the monthly rental income on each of their properties must cover at least 125% of their mortgage payments, tested at an interest rate of 5.5%.

This calculation is known as the ‘interest cover ratio’. Some lenders have chosen to test affordability at ratios up to 145%, meaning heavily mortgaged landlords or those with low rental yields could struggle to obtain a loan.

Top slicing helps low-yield landlords

With this in mind, some banks are using a system known as ‘top slicing’ in their calculations, with Mansfield Building Society the latest to launch this type of deal.

Top slicing takes a landlord’s personal income, such as their salary or pension income, into consideration when assessing their affordability, rather than just looking at the profitability of their property portfolio.

Top slicing is good news for landlords buying higher value properties which might have lower rental yields, as it allows them to use external personal income to bridge any shortfall.

David Blake of Which? Mortgage Advisers says: ‘As the buy-to-let market continues to evolve, more lenders are adopting a holistic approach to their lending.’

‘This means they are not purely concerned with the rent a property will achieve, but also the client’s overall income and indebtedness’.

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Are top slicing deals widely available?

So far, only a handful of lenders have adopted top slicing in their affordability calculations.

It remains to be seen whether more will follow suit in the next few months as an increasing number of landlords seek to take out extra borrowing.

How have lenders reacted to the PRA changes?

While the majority of lenders are stress testing affordability at an interest rate of 5-5.5%, their approach to interest cover ratios differs significantly.

The table below shows the minimum interest cover ratios allowed by each lender.

Will landlords face a more limited choice?

While it’s too early to say if the new regulations will have a significant effect on the number of deals available, some lenders have already decided to steer clear of the portfolio market.

Each of the lenders in the table below have confirmed they will only accept loan applications from landlords with three or fewer properties.

*This article was amended on 30 October to correct an error. Coventry Building Society does not practice top slicing.  

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