Top-Slicing to Support an Experienced Portfolio Landlord

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Even seasoned portfolio landlords need a helping hand every now and again. A landlord may turn to us for a BTL mortgage for a straightforward, solid investment. Say they plan to invest in a modern, large family home in a prime residential area.

They’re investing for long-term capital growth and income from stable, professional tenants. The property was already let to a young family on a two-year agreement. This was par the course for the borrower, who had 15 properties within their portfolio.

The Challenge: Meeting ICR Requirements

But, at a bank level stressed rate, as is often the case for higher value properties, the ICR for the deal required a higher rent than the property could realistically achieve in its local market. Even with a 60% LTV, the rental income fell short of the ICR by roughly £1,000 per month. There is no quick-fix for this issue, and it would force the borrower to inject more cash than they wanted to part with into this deal, limiting their ability to keep capital for other purchases or unforeseen costs.

How Top-Slicing Can Make the Deal Work

Thankfully, our ability to utilise top-slicing could help here. Our underwriter would comb through the borrowers’ details for surplus income that could help with the shortfall. By going through various documents, we’d be able to confirm that the landlord generates an additional £15,000 a month after all costs from their business and property portfolio.

We’d assess this surplus and, so long as it worked for the borrower’s circumstances, we could agree to use a portion of it to “top-up” the ICR gap. We’d address the shortfall using their wider income rather than relying on rent alone.

With top-slicing in place, we’d be comfortable in supporting the borrower’s expansion plans. The property’s rent would remain the primary repayment source, but the surplus income would boost the ICR to within an acceptable limit.

FAQs

What is ICR?

Interest Coverage Ratio is a financial metric that measures a person’s (or company’s) ability to pay the interest on their debt. It serves as a gauge indicating whether a borrower can meet their debt obligations, expressed in percentage terms and for landlords, it reveals the portion of gross rental income required to cover expenses like mortgage repayments, and other costs.

What is the ICR percentage needed for a loan?

Most lenders will set interest coverage ratios of between 125% and 145%. Our ICR will be a minimum of 125% for our fixed loans, and 130% for tracker loans. However, we have several tools to help with affordability such as top-slicing, deferring interest, and rolling up interest.

What does LTV mean?

Loan-to-value is a ratio used to measure how much money is being borrowed compared to the value of the property. it’s expressed as a percentage and the higher the percent, the riskier it is for a lender, which often translates to higher costs and stricter terms. Across Market Financial Solutions’ product range, we have maximum LTVs of 75%, meaning the loan will be worth 75% of the property’s value.

Do all lenders offer top-slicing?

Generally no, not all lenders offer top-slicing. It is a niche solution often only provided by specialist lenders. Also, where it is offered, there may be limitations in place. Top-slicing may not be available to first-time landlords, for example.

Will Market Financial Solutions lend to first-time landlords?

Yes, so long as the circumstances work and their exit strategy is clear. Our BTL mortgages are split into different tiers and we have specific tranches that can be utilised by first-time landlords. While we’re happy to hear from first-time landlords, we do require that they have a minimum income of £30,000, which can be earned or from a private pension(s). All our deals are underwritten from day one of an enquiry, so our brokers and borrowers will be paired with the right product for them as soon as possible.