Top-slicing or ‘income top-up’ involves incorporating an applicant’s earnings to bridge the affordability gap when the rental income falls short of meeting the lender’s criteria for rental affordability. We are, of course, discussing “Buy-to-Let Finance.”
A predominant buy-to-let finance
trend involves opting for a five-year fixed rate to address rental income insufficiencies. However, the potential drawback arises when early repayment charges (ERCs) bind borrowers to a five-year commitment, which may not always be optimal.
Some lenders, such as Foundation and Precise, have introduced a more flexible approach by offering five-year fixed rates with only three years of ERCs. This unique feature allows borrowers to benefit from a rental calculation based on a five-year period while committing to only a three-year term. Despite the advantages, such products remain relatively scarce in the market.
While several lenders now provide income-based BTL products, their adoption has not reached the expected levels. One plausible explanation could be attributed to the intricate nature of calculating affordability and the associated conditions accompanying these products.
The complexity of these income-based BTL products may deter their widespread use. When advisors identify a shortfall in standard rental calculations, evaluating various criteria becomes essential to determine whether opting for a top-slicing BTL solution is a viable and effective strategy.
Buy-to-let finance | Minimum income requirements
Regarding buy-to-let finance, income requirements play a crucial role in the lending landscape, as most lenders thoroughly evaluate an individual’s financial standing through a detailed income and expenditure calculation. To ensure a comprehensive understanding, financial advisers must collect all pertinent details related to income and expenditure upfront.
Certain lenders impose minimum income prerequisites as part of their lending criteria. For instance, Metro and Zephyr set a benchmark, allowing rental income top-up only for individuals earning £50,000 or more. Notably, Zephyr and Precise adopt a unique approach by considering surplus property rental for the top-up, distinguishing them from lenders who solely assess other earned income.
Beyond minimum income requirements, some lenders establish additional criteria for income top-up eligibility. Notably, Vida and Kent Reliance exclude portfolio landlords with four or more Buy-to-Let properties from their product offerings. This restriction can be rationalised to some extent, considering that surplus income can only stretch so far in covering properties with rental shortfalls, posing increased risk as interest rates climb.
Nevertheless, the emergence of innovative products like Precise’s, which defy such restrictions and introduce alternative affordability models, contributes to expanding choices in the market. This flexibility enables borrowers to explore diverse options tailored to their unique financial circumstances. As the lending landscape evolves, introducing such products showcases a commitment to providing borrowers with a more nuanced and adaptable array of financial solutions.
Buy-to-let finance | Rental coverage requirements
Rental coverage prerequisites present a multifaceted challenge for property investors. In nearly all instances, a minimum level of rental coverage is obligatory, further complicating matters. Take Kensington, for instance—they permit a top-up only if the rent surpasses the mortgage by a minimum of 125 per cent. This option is extended to portfolio landlords and limited companies.
However, the intricacy deepens as each lender establishes a distinct minimum rental coverage. Noteworthy lenders exhibit varying benchmarks; Precise sets it at 110 per cent, Vida at 115 per cent, Bluestone at 112 per cent, and Kent Reliance has no fixed minimum.
The foundation for these benchmarks varies widely among lenders. Some rely on a notional rental calculation of 5.5 per cent, while others hinge on the pay rate of the product. Such diversity among lenders explains the underutilisation of products considering the applicant’s income.
To address this challenge, some lenders now provide online calculators on their websites. These tools aim to facilitate advisers in navigating this intricate landscape.
Advisers must not default to a five-year fixed rate. Instead, they should carefully evaluate alternative options to determine the most suitable recommendation for their clients. By doing so, they can ensure a more tailored and effective approach to rental coverage requirements.
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