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Changing a Commercial Mortgage to Residential

Wondering if and how you can change a commercial mortgage to residential? Get all the answers you need with our in-depth guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 1, 2022

There could be several reasons why you might want – or need – to change a commercial mortgage to residential. It may be that you have ceased trading and want to convert your premises into a home. Or you might be looking to buy unused commercial premises with a view to converting them.

In this article we’ll explain how to go about it, eligibility requirements and why it’s essential you use an experienced commercial broker to guide you through the process and ensure you get the best deal.

Can you change from a commercial mortgage to residential?

Yes, it’s possible. Switching to a residential mortgage used to be a complicated process but was made far easier by regulation introduced in 2015.

There are clear distinctions between the two which is why you need to switch. A commercial mortgage application examines the cash flow of the business to determine whether it is approved. A residential mortgage focuses on the circumstances of the individual borrower(s).

As more businesses close, such premises can be converted into residential homes. If the property still has an outstanding commercial mortgage remaining then this loan will need to be repaid in full as part of the process. In most cases, the most appropriate way to do this is by switching to a residential home loan.

The funds raised from a residential application can be used to, first – repay the outstanding commercial loan and, second – any remaining funds can go towards the required renovations to the property.

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Will your interest rate change?

Your interest rate will almost certainly change for the better. Residential rates are typically lower than those for commercial properties so you should end up on a lower rate after switching.

But as this is a slightly more complicated process than a straightforward remortgage, it’s highly recommended that you speak to a broker with knowledge of this market to ensure you find a lender that is sympathetic to your circumstances and will offer you the lowest rate.

Things to consider before you switch

There are three key considerations if you want to switch from a commercial mortgage to residential, namely:

  • Change of use for the property
  • Any planning permission that may be required
  • What the overall costs could be

Change of use for the property

However you come to own your commercial property, it’s important you know what class of building it is as this will help you determine how viable the project is and whether it’s possible to change the usage and classification to a C class (which includes residential properties).

Broadly speaking, there are five classifications that buildings come under (although technically there are eleven as some have sub-classes).

UK Building Classes Building Purpose
B Class Industrial processing premises or warehouses and open air storage facilities
C Class Residential properties of all types, i.e house, HMO, hotel, care home, hospital etc
E Class Professional services premises, including restaurants, gyms and offices etc
F Class Non residential leaning facilities, such as schools and colleges, and community use premises, such as shops, recreational halls and Libraries
Sui Generis Buildings generally fall into this class when they fall outside the defined limits of any other use class, but may include: theatres, fuel stations and casinos

This is the list following changes applied in 2020 that saw classes A and D removed.

Planning permission

It’s likely that you will be making significant changes to the interior layout of the building so you may also need to get planning permission from the local authority. These days, there are lots of commercial property types that can be converted to residential without the need to apply for planning permission.

Depending on the property and the nature of a development, your project may be allowed under permitted development rights. In this case, you will not need to get planning permission. Be aware, though, that permitted development and planning permission rules vary from one local authority to another, so you will need to check the situation locally.

Even in situations where planning permission is not required, you will still need to apply for ‘prior approval’. This is basically a request for your local authority to confirm specified parts of your development project are acceptable before you can start work. Prior approval may not be granted if the building is at risk of flooding, for example.

If you’re looking to buy commercial property to convert, look for ones with planning permission already approved. They usually cost more but you can buy with greater confidence.

Overall costs

You will also need to consider the overall cost of the development project that could include:

  • Planning permission
  • Prior approval fee
  • Stamp duty if applicable
  • Legal fees
  • Architect fees
  • Cost of the work – these types of projects are notorious for unexpected costs so bear that in mind

How to change a commercial mortgage to residential

Follow these steps to complete your switch:

  1. Check if your property is an exception – lots of commercial buildings are now eligible for conversion but there are exceptions, notably:
      • Listed buildings
      • Buildings in a national park or conservation area
      • Buildings with a designated area of outstanding natural beauty (AONB)
      • Buildings in military explosive zones or safety hazard areas
  2. Identify the current use class of the building
  3. Find out if you need to apply for planning permission (NB: this is different from applying for change of use). You will typically need to apply for planning permission for any building larger than 150 square metres or if your plans involve extending, changing its external appearance or altering/moving windows or doors.
  4. Work out your budget (along with a business plan and exit strategy if buying to convert)
  5. Arrange your finance – There are several ways that you could do this and the right method for you will be determined by the details of your project.
    Options include:

It’s important to note that, following the structural changes to the property, you will need to be the registered owner of it for six months before you can apply for a change of mortgage.

Whether you already own the property you want to convert or intend to buy will determine when you get a valuation and survey done. It’s worth noting though, that safety regulations are tighter for residential homes than business premises so it’s likely you will need to carry out a fair amount of work to make sure it is eligible for a residential mortgage.

If you want to convert a property for mixed purposes, for example to add a residential element to a pub or shop, the mortgage you require will depend on what percentage of it will be intended for residential use.

Which lenders will let you switch?

This is a niche area of lending that is not readily available via mainstream lenders, with the possible exception of Barclays. There are specialist providers who have a more flexible approach to lending and will assess applications on a case-by-case basis.

While they are open to a variety of circumstances and conversion plans, they are not always easy to find as they tend not to advertise. Most will only accept applications from a broker.

Converting bigger commercial properties like office blocks will require specialist development finance that is only offered by a few lenders. A broker can help you figure out the best way to approach a loan of this type.

Bridging finance to buy a commercial property to convert

If you’re looking to buy with a view to converting, you will usually need to apply for a ‘heavy refurbishment’ bridging loan to get your project started. Heavy refurbishment refers to renovations involving structural alterations and change of use. Before applying you will need to draw up a comprehensive business plan that details how the funds will be used and what your exit plan is.

Most lenders have a maximum loan to value of 70% so you will most likely need a deposit of at least 30%. A larger deposit will allow you to access better rates and terms. Providers don’t typically advertise their rates as each application is assessed on its own merits.

As a guide, though, with a strong application and 30% deposit, you can expect rates to start at around 0.74% pcm, while a 50% deposit might get you a rate of 0.54%.

This type of loan requires you to draw up a comprehensive business plan that clearly explains why your proposal will succeed and what your exit plan is for the bridging loan.

Possible exit plans include converting to a residential mortgage and either living in it or selling it, or switching to a buy to let mortgage.

Once you have everything in place, you can usually expect to receive credit-backed terms within 24 hours of applying. If you agree to the terms, a formal offer will be made and you will need to submit your documents. Assuming there are no hiccups, completion should take less than a month.

Changing a commercial mortgage to a residential buy to let

If you plan to let out your new property (or properties) post-construction, you can apply for a Decision in Principle (DIP) on your buy to let mortgage when you take out bridging finance. A DIP will serve as your exit strategy.

In addition to the usual eligibility criteria, most providers will favour applications from experienced developers who can evidence proven success with this type of deal. First-time developers can apply, but it is wise to partner up with an experienced landlord or developer to add weight to your application.

You will need to do research into the rental market in the area as lenders will need to see that there is sufficient demand for you to realistically expect the homes to be occupied, and that rental yields will cover at least 125% of the monthly mortgage payments (in some cases 140%).

Fortunately, many commercial properties available for developers are in town centre or city centre locations that are desirable.

For maximum rental income, houses of multiple occupancy (HMOs) are often the best choice. For this, you would need to switch to a buy to let HMO mortgage.

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Find a broker experienced in commercial and residential mortgages

While regulation has made switching from a commercial mortgage to residential easier, it remains a complex area of finance. Add the fact that there are relatively few providers willing to lend and it’s clear to see why an experienced broker is essential to have on your side.

Our unique broker matching service will partner you with an experienced commercial to residential mortgage broker who has helped people in your situation to secure the best deal.

It only takes a few minutes to provide the details we need to find your ideal broker. Call today on 0808 189 2301 or enquire online to arrange a free, no-obligation chat.

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We know everyone's circumstances are different, that's why we work with mortgage brokers who are experts in all different mortgage subjects.

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About the author

Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes. The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.

Pete’s presence in the industry as the ‘go-to’ for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!

Read more about Pete

Pete Mugleston

Mortgage Advisor, MD

FCA disclaimer

*Based on our research, the content contained in this article is accurate as of the most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The information on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs.

Some types of buy to let mortgages are not regulated by the FCA. Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.

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