Affordability is of course one of the basic requirements that a lender will assess on any buy-to-let mortgage application.
The borrower will need to be able to demonstrate that they can afford to repay monthly mortgage payments in full, based on the amount of rental income they can generate from a property.
As an extra level of protection for the borrower, against a change in their financial position, they must demonstrate that they could afford a sum that is greater than the actual monthly repayment. This sum is commonly up to 145% of the repayment sum, or more, for specialist lending.
The affordability calculation will also use an assumed interest rate, which is typically higher than the initial rate of the loan, thereby taking into account any future interest rate changes.
Whilst many lenders are very strict on this and will only consider rental income from the property, some lenders will permit a factor known as ‘top-slicing’, which takes into consideration the borrower’s other sources of income.
If, for example, a landlord has to repay £1200 per month on their buy to let mortgage, but only receives a rent of £1000, they could use their earned disposable income to top up the missing £200.
It may be that the rent covers the mortgage, but the extra coverage required by the affordability calculation exceeds this; again, the landlord may opt to borrow from a lender who will accept their other earnings.
Top-slicing could prove more popular among lenders as well as landlords, following the arrival of stricter buy-to-let lending criteria during 2017, as it could potentially help to ensure fewer borrowers are excluded from being able to borrow on the grounds of affordability.
However, it is important for anyone considering these options to weigh up if it is the right choice for them. Borrowing in this way may impact the mortgage rate you are charged, which will in turn affect your monthly repayments.
Commercial Trust Limited works with a variety of specialist lenders across the buy-to-let marketplace, including some offering the top-slicing option. Top slicing is an issue that needs to be considered carefully and may not be ideal for everyone, so it is worth speaking with a specialist broker to assess your options.
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