Mortgages for Semi-Commercial (Mixed Use) Properties

If you’re looking to buy any property with a commercial and residential element, you may have heard of the term ‘semi-commercial mortgage’. But what is a semi-commercial mortgage, and when do you need one?

In this article, we’ll explain what a semi-commercial mortgage is, how to apply for one, and why it’s important to consult a specialist broker to secure the best deal.

What is a semi-commercial mortgage and how do they work?

Semi-commercial mortgages are used to purchase or refinance any building or plot of land used for commercial and residential purposes. They are sometimes called ‘mixed-use mortgages’.

These loans are handled similarly to commercial mortgages, meaning you usually must approach a commercial lender.

This makes them very different from standard residential mortgages that often have strict lending criteria and maximum amounts based on income multiples. Instead, each application is assessed on its merits and the operating profit your property will generate.

They can be:

• Owner-occupied properties where you live and work (typically taken on repayment terms).
• Commercial investment properties that are let out (often taken on interest-only terms)

You may want to live/work in one part of the property and rent out the other. There is no reason this can’t be done, but in these circumstances, you should seek professional advice before proceeding with an application.

However, many lenders will only approve a loan if you intend to run your business from the commercial part of the property.

This type of mortgage is used to buy already mixed-use property but is also necessary if you convert a property to dual-use. In this case, you would need to remortgage from your existing residential or commercial mortgage, which would no longer be suitable.

Which properties require one?

Typical examples of where a semi-commercial mortgage might be required include:

• Retail unit with a flat above
• Pub with residential living space
• Guest house with a living area
• Chiropractor working from home

Regardless of how the two elements are divided in terms of floor space, if there are dedicated areas for each, you’ll likely need a semi-commercial mortgage. However, some lenders may have specific requirements regarding how the space is allocated.

A mixed-use mortgage may not be necessary if each element of the property has its own entrance.

In these circumstances, you could have two separate mortgages: one residential and one commercial. However, not all providers would entertain such a deal, and there may be complications when it comes to shared parts of the building, like the roof. Issues may also arise if the property is all on one legal title.

How to get a mixed-use mortgage

Treating mixed-use mortgages as commercial finance offers greater flexibility in the application process. But it can also mean it’s more difficult to compare deals and know how competitive the one you are offered is.

This is because there are no advertised rates, and lenders will offer you a bespoke deal based on your circumstances and their attitude to risk. The result is that rates and terms can hugely differ from one lender to the next.

To make sure you get the best deal possible according to your situation, follow these three steps:

1. Be clear about what you want to achieve: This is a major financial commitment, so you need a clear vision. Write a thorough and honest business plan that includes all associated costs and ongoing expenses.
2. Get your documents together: In addition to your business plan, which will need to convince mortgage providers that your venture is a good risk, you will need to supply documents such as proof of ID, up to six months of personal and business bank statements, proof of income and outgoings, and details of any other property you own.
3. Speak to a specialist commercial broker: Semi-commercial mortgages are complex deals. They require expert advice from somebody with experience in this type of borrowing and deep knowledge of providers who operate in this sector. We work with business mortgage brokers who have a track record of success in securing semi-commercial mortgages at the best rates and understand how each lender assesses applications.

Eligibility criteria and deposit requirements

When assessing semi-commercial mortgages, lenders tend to focus more on the commercial aspect of the property. As with all types of borrowing, you must meet each lender’s criteria.

As a general rule, these are the areas they will look at:

• Affordability: Affordability is predominantly based on the strength of your business plan and projected revenue. Earnings are often calculated before interest, depreciation, and amortisation (EBITDA), but some lenders may use other metrics, such as net income, to assess affordability.
• Trading history: The longer you have been in business and performing well, the less risk you pose to the lender. Start-ups can get deals but are unlikely to offer the most competitive rates.
• Your borrowing experience: Providers may be wary if this is your first-ever mortgage or your initial foray into commercial lending. That’s not to say you won’t be able to get a mortgage, but you may not be offered the best rates straight away. Buy-to-let landlords who have had investment property for a couple of years may be able to negotiate a competitive rate based on this experience.
• Credit file: Lenders will assess the credit file for your business and you. If both are exemplary, you will have access to a broader pool of lenders and, therefore, more favourable rates. If you or your business has adverse credit, you may need to apply for a commercial bad credit mortgage.
• Property value: Some lenders will only finance a property valued at £25,000 or more. Some go even higher and loan a minimum of £250,000. There is usually no upper limit to property value.
• Covenants or ties: Not all lenders will approve a loan for all use types. For example, if you’re looking for a mixed-use mortgage to buy a farm, you may need to approach a lender who deals in agricultural mortgages.

Deposit requirements

Each lender has its own maximum loan-to-value (LTV), which is typically between 60% and 80%. While rare, obtaining a 100% semi-commercial mortgage is occasionally possible, though this generally requires substantial additional security, such as other properties or assets.

The larger your deposit, the less of a risk your loan is to the lender and, therefore, the better rate you are likely to be offered.

Higher-risk businesses, for example, pubs or nightclubs, typically require bigger deposits. For example, if you’re looking for a semi-commercial mortgage to buy a pub, you usually need a deposit of at least 30%.

What interest rate to expect

As mentioned earlier, advertised rates for semi-commercial mortgages are uncommon. However, typical interest rates generally range from 1% to 2% above the Bank of England base rate.

For borrowers with adverse credit, it’s not uncommon to see rates go above this threshold.

Rates are usually slightly lower for owner-occupiers as they are considered lower risk. This is because their ability to keep up with repayments is based solely on their circumstances rather than those of third-party tenants.

Get matched with an expert semi-commercial mortgage broker

With so many variables to contend with, applying for a semi-commercial mortgage is not something you should undertake unless you work in the mortgage industry and are 100% confident you know how to get the best deal.

We work with brokers with extensive knowledge and experience in arranging mixed-use mortgages. Our specialised broker-matching service will evaluate your needs and connect you with the most suitable advisor.

To get matched with your ideal broker, call 0330 818 7026 today or enquire online to arrange a free, no-obligation chat.