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Changing a Residential Mortgage to Commercial

Looking to change your residential mortgage to commercial and need advice on how to go about it? Get all the answers you need in our comprehensive guide.

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Pete Mugleston

Author: Pete Mugleston - Mortgage Advisor, MD

Updated: August 1, 2022

Switching from a residential mortgage to a commercial mortgage is more common than you might first think. It’s not uncommon for dentists or chiropractors, for example, to operate out of properties that were once their homes.

But, with significant differences between residential and commercial mortgages, how do you complete the switch? In this article, we’ll look at the steps required and why it’s essential you use an experienced broker to make sure everything is completed correctly, with the best deal available.

Can you change a residential mortgage to commercial?

The good news is that it is perfectly possible and entirely legal. But it is very different from applying for your first home loan or remortgaging. Due to the regulation of each type of loan – residential mortgages are regulated products whereas commercial mortgages are not – simply switching from one loan to the other is not possible.

As a result, to move from residential to commercial would involve a new mortgage application, and raising sufficient borrowing to pay off the outstanding residential loan plus the funds required for renovation to the property in order for it to achieve commercial classification.

Before you can start looking at lenders and rates for your new mortgage, there is a legal process to follow. When you do approach a mortgage provider, they will need to see documentary evidence that the conversion has been approved so getting this groundwork right is crucial to having a mortgage approved.

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Things to consider

The first thing you will need to do is contact your local authority and put in a request for a change of use. All buildings in the UK are classified according to their usage and altering a property from residential to commercial use will almost certainly require approval from the local council.

This is different from planning permission which you will need to apply for separately.

Planning permission

You may have heard about permitted development rights that allow for some changes of use without the need for planning permission.  But in this instance, permitted development rights are unlikely to be on your side. This is because most councils have specific areas dedicated to retail and commercial use and your property is likely to be in a residential area.

There are also exceptions for buildings that are in a designated Area of Outstanding Natural Beauty, (ANOB) or conservation area, and for listed buildings. You may be unable to apply for a change of use under these circumstances.

Even in situations in which planning permission isn’t required, you’ll need to make a prior approval application to the council who will look at your proposal to assess its impact and risk factors. Planning permission and prior approval applications must be paid for.

So, ultimately, you will need to speak to your local council at some point and it makes sense to contact them first to discuss your plans and find out what the local planning laws are. This shouldn’t worry you too much as councils are generally sympathetic to this kind of switch.

Building regulations

It’s worth noting that building regulations differ too. For example, a commercial building must comply with the Disability Discrimination Act and will be subject to strict regulations when it comes to areas such as health and safety and energy consumption.

Recent legislation has made it easier to convert a residential property for commercial use, but it remains a complex process with plenty of red tape. For this reason, it’s important you seek independent, expert advice early on as falling foul of building regulations could result in astronomical costs.

If you’re only planning to convert part of the property for commercial purposes (maybe converting downstairs into a shop but continuing to live upstairs), you will usually need to apply for a semi-commercial mortgage.

What criteria you’ll need to meet

Lenders will need to satisfy themselves that the project is viable and secure if they are to approve your loan.

Aside from the necessary approvals from the local council, the following criteria and factors will need to be considered:

  • You’ll need a strong business plan that gives a lender confidence you will be able to meet the new repayments.
  • Generally speaking, you will need a deposit of at least 25-30% for a commercial mortgage. This could come from equity released when you complete the switch, savings or putting up other assets as security.
  • Commercial lenders are more concerned with the prospective cash flow of the business than your individual circumstances. This might be to use the premises to run your own business, let it out to other businesses or sell it.
  • However, your own personal circumstances can influence a lender’s decision. If you have other properties or assets that you can use as collateral, that will obviously be looked on favourably.
  • Adverse credit, while not necessarily preventing you from successfully applying, will raise concerns for providers and could result in rejection or a mortgage offer at high rates.

It makes sense to speak to a mortgage broker with experience in this field as soon as possible. They will be able to assess the viability of your business plan and carry out a soft search on your credit file. This should give you a good indication of whether your application will be successful and what you could do to strengthen it.

How your interest rate will change

Rates tend to be higher on commercial loans so it’s likely you will see an increase in your monthly payments. The rate you are offered will be dependent on the strength of your application, and eligibility factors – as outlined above – are different from residential borrowing.

How a broker can help you change your mortgage

It’s highly unlikely that you will be able to change your mortgage to commercial with the same lender as this is a specialist area of lending.

A broker with experience in this niche and working relationships with specialist lenders will be able to help you package your application correctly and can also act as an advocate on your behalf.

This type of lending is based more on negotiation and relationships than it is on hard and fast rules so having an expert on your side can be the difference between acceptance and rejection.

If you get in touch we’ll arrange for an experienced commercial broker to contact you for a free, no obligation chat about how this all works.

Changing a residential mortgage to a commercial buy to let

If you are looking to convert your residential property into a commercial buy to let, you will typically need a deposit of at least 25% (up to 40% with some providers).

Lenders will assess your business plan, experience and personal financial situation to satisfy themselves that the loan is a good risk and that the anticipated rental income will cover 125% of the mortgage payments (in some cases 140%).

If you’re looking to buy residential property with the intention of converting it into a commercial buy to let, bridging finance or development finance might be more suitable and can help protect you from having to pay early settlement fees when you switch.

If you’re only planning to only convert part of the property for commercial purposes (maybe converting downstairs into a shop you want to rent out but continue to live upstairs), you will usually need to apply for a semi-commercial mortgage.

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Get matched with a broker experienced in residential and commercial mortgages

The brokers we work with have whole of market access and cover the entire spectrum of specialist lending areas.

You can use our unique broker matching service to make sure you get paired with one who has experience in converting residential mortgages to commercial and securing the best possible rates for people in your situation.

Call today on 0808 189 2301 or enquire online to arrange a free, no-obligation chat.

FAQs

Will I have to pay stamp duty when I switch?

It depends. If switching to a BTL, you will need to pay stamp duty as landlords are required to pay 3% more than homeowners. Stamp duty on commercial properties is calculated according to a different scale and you will need to pay any applicable difference.

How long will the process take?

It can take months to get all the approvals, but once you have all relevant documentation you can usually get your formal mortgage offer within 30 days.

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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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