'Top-slicing' for BTL affordability assessment - impact on residential remortgage for main residence

JohnTravoltage

I have a BTL mortgage that's coming up for a remortgage, and the rent is only about 115% of the monthly mortgage payment (interest-only). This is leading to lenders offering to lend me less than the current outstanding mortgage amount.

One option that I've heard about that might help is 'top-slicing' where my other income (i.e. disposable income from my salary) is taken into account in computing my BTL affordability. For instance, if my interest-only mortgage payment is £1000, and the rent is £1150 (115%) and the lender requires rent to be 150% of the mortgage payment, then they would consider my salary income for making up the £350 shortfall, and this would allow them to lend the full outstanding mortgage amount I need. 

My question is if this £350 (as an example, as calculated above) will be considered a fixed outgoing/financial commitment when the time comes in a few months to remortgage my other, residential, property in which I'm living, and thus potentially hurt my affordability assessment for that remortgage. 

Note that the £350 isn't actually going out of my bank account, and is only being considered as available to pay the BTL mortgage payment if needed. 

JMA74

No it won't, but some residential lenders will stress the btl payment anyway and could deduct even more as a running cost

Some continue to disregard as long as the rent is more than 100% of the mortgage payment but I think that will be a smaller and smaller group of lenders doing that 

JohnTravoltage

JMA74 said:

No it won't, but some residential lenders will stress the btl payment anyway and could deduct even more as a running cost

Thanks @JMA74. 

If lenders stress the btl payment, wouldn't that automatically impact affordability on the residential mortgage?

So basically, just having a btl with a low interest coverage looks like it's a handicap for the residential mortgage, top-slicing or not (with top-slicing obviously making it harder still)?

simon_or

With a mortgaged rental property in the background, all that matters to the residential bank you are applying to for a remortgage is whether or not it needs to be factored in for affordability and if so how much of a 'burden' it is.

Depending on the bank, they calculate it in a lot of different ways which essentially is based on a combination of - BTL monthly payment, gross rent, any rental property expenses you are responsible for, size of mortgage, etc.

Whether or not you top-sliced to get the BTL mortgage or not will not feature in this assessment.

JMA74

Simon pretty much covered it all.  The resi lender doesnt care how your BTL application was assessed.  If you have a £200k BTL with a payment of x and a rent of y then they dont care if that was assessed on rental only, or top slicing. 

Some lenders will look and say that 'as long as y is higher than x then we will ignore'
Some will look at it differently, for example Leeds Building Society state: The monthly rental income of background BTL properties held by the applicant(s) must cover the cost of any associated mortgage payments (interest only) using an ICR of 145% at 7.0%
And then others such as HSBC who will take all the running costs of the property as expenses, and then require the tax returns to add any income back on to the case.  

There are still currently plenty of lenders in the first camp where they will ignore background properties, but as criteria and lending tightens up I wouldnt guarantee this continuing as they will want to get a fuller picture of a borrowers finances. 

silvercar

Interesting. I would have thought that lenders would assume that borrowers would prioritise payments on the residential mortgage over any BTL. Logically the priority would be keeping a roof over your own head.

JohnTravoltage

JMA74 said:

There are still currently plenty of lenders in the first camp where they will ignore background properties, but as criteria and lending tightens up I wouldnt guarantee this continuing as they will want to get a fuller picture of a borrowers finances. 

@JMA74 Thanks. Do you know how Skipton views such background BTL properties that have less than 125%/145% ICR when they evaluate an application for a residential mortgage?

Considering going with Skipton for my resi mortgage renewal next year

JohnTravoltage

Any idea about this, anyone? 

jj_43

The £350 shortfall won’t directly be assessed, but with only 115% rental cover you must be making a loss after tax and other costs which the lender would consider.

JohnTravoltage

jj_43 said:

The £350 shortfall won’t directly be assessed, but with only 115% rental cover you must be making a loss after tax and other costs which the lender would consider.

Thanks @jj_43 - so essentially as long as my overall income (perhaps net of the BTL loss - say a loss of about £200 a month) is meets the affordability for the amount I'm looking to borrow, the lender won't specifically look at whether the BTL has 125%/145% ICR?   

jj_43

Yes that’s top slicing. Not all lenders offer this so your product selection will be restricted and prices higher. It’s a relaxation/lower standards for lending. What can you do to avoid this? Increase rents? Put in more equity?