Mortgages for Semi-Commercial (Mixed Use) Properties

If you’re looking to buy any type of property that has both 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 one is, how to apply and why you should speak to a broker who specialises in this niche to ensure you get 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 that is used for both commercial and residential purposes. They are sometimes called ‘mixed-use mortgages’.

These types of loans are handled in a similar way as commercial mortgages so you will usually need to 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 own merits and the operating profit your property will generate.

They can be:

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

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

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

This type of mortgage is used to buy property that is already mixed-use but is also necessary if you convert a property to dual purpose. 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 split in terms of floor space, if there are dedicated areas for each, it’s likely you’ll need a semi-commercial mortgage. But it’s worth noting that some lenders stipulate how the floor space can be split. For example:

• Market Harborough Building Society will not lend on any property where the commercial element takes up more than 40%
• Penrith Building Society insist the residential must make up at least 40% of the square footage
• Other providers apply a similar split but may base it on the monetary value of each part of the property

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 allows for 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 really 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 of this is that rates and terms can be hugely different 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 in your mind 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 proof of ID, up to six months 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 of this type of borrowing and a 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

For semi-commercial mortgages, lenders will be more interested in the commercial aspect of the property when assessing your application. As with all types of borrowing, you will need to meet each lender’s criteria.

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

• Affordability: This is predominantly based on the strength of your business plan and projected revenue. Earnings are usually calculated before interest, depreciation and amortisation (EBITDA). However, your personal finances will be assessed too so it makes sense to ensure your outgoings are manageable and all commitments are up to date.
• Trading history: The longer you have been in business and performing well, the less of a risk you pose to the lender. There are deals available to start-ups, but these are unlikely to offer the most competitive rates.
• Your borrowing experience: If this is your first ever mortgage, or your initial foray into commercial lending, providers may be wary. 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 for you personally. If both are exemplary, you will have access to a wider pool of lenders and, therefore, more favourable rates. If you or your business have any adverse credit, you may need to apply for a commercial bad credit mortgage.
• Property value: Some lenders will only finance a property that is valued at £25,000 or more. Some go even higher and loan a minimum of £250,000. There is usually no upper limit to the 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 their own maximum loan to value (LTV). This is typically between 60% – 80%. However, it is possible to get a 100% semi-commercial mortgage if you have other property or assets that you can put up as security.

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 will usually need a deposit of at least 30%.

Which lenders offer them?

Mixed-use mortgages are becoming increasingly popular, particularly with investors, and it’s possible to obtain finance from high street lenders including:

• Barclays
• Halifax
• Santander

But it’s still worth shopping around as there are several complexities involved in this type of borrowing that mean rates fluctuate wildly.

In many circumstances, your best offer will come from a specialist lender with flexible lending criteria and experience of working with borrowers who operate in your business niche.

What interest rate to expect

As previously stated, advertised rates are hard to come by in this niche. But as a guide, typical interest rates are between 1%-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 seen as lower risk. This is because their ability to keep up with repayments is based solely on their circumstances rather than on 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 alone unless you work in the mortgage industry and are 100% confident you know how to get the best deal.

We work with brokers who have extensive knowledge and experience in arranging mixed-use mortgages. Our unique broker matching service will assess your requirements and then pair you up with the best advisor for you.

To get matched with your ideal broker, call today on 0808 189 2301 or enquire online to arrange a free, no-obligation chat.