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Semi Commercial Mortgage

Discover everything you need to know about semi-commercial and mixed-use property mortgages from the independent financing experts!

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

Almas Uddin2024-06-15
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Financing Semi-Commercial Properties

Learn all the vital information you need to know to apply for a semi-commercial mortgage, understand the differences between lender eligibility criteria and make informed decisions about the right financing solutions for you.

Semi-Commercial Mortgages Explained

A semi-commercial mortgage – also called a mixed-use mortgage - is exactly as it sounds. These products are designed to finance the purchase or refinancing of a building which is split between residential and business use. For example, a flat above a shop or a pub with living space above would be considered semi-commercial.

However, a semi-commercial mortgage isn't the same as a mortgage you might take out against a residential property or a building solely used for commercial trading. Therefore, it's important you grasp the contrasts and can determine which product is the most suitable option.

Mixed-use mortgages also cover a broad scope of property types, so they are necessarily a little more flexible than a standard commercial mortgage. You might need a semi-commercial mortgage for a premise that accommodates any business, from a shop to an office or storage unit, if a home is attached to it and both parts of the building fall under the same freehold agreement.

Likewise, semi-commercial mortgages apply to scenarios such as having a B&B or guest house where you live on-site as the owner. Because part of the property is a business and rented to guests, and part is your home, you'll likely need a mixed-use mortgage to complete a purchase.

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The Contrasts Between Mixed-Use or Semi-Commercial Mortgages and Other Mortgage Products

From a mortgage lender's perspective, the reason these mortgages are so different is that any property purchase deal linked to a business premise needs to be approved by a provider who offers commercial lending. Residential mortgages are regulated and assessed in a very different way, so applicants for mixed-use mortgages are considered on a case-by-case basis since each scenario will relate to an alternative property.

It's also wise not to try and compare buy-to-let and semi-commercial mortgages since even if you plan to rent out part of the semi commercial property to help with the purchase costs, it remains a business venture, which carries a different profile than a property you're buying solely to rent out.

Semi-commercial mortgage lenders have multiple factors to consider before they make an offer to lend, from the viability of the business plan to the details of a lease agreement and the profitability you can reasonably expect to make.

These mortgages are more specialist than others, making it more important to consult with an experienced, independent commercial mortgage broker who can recommend appropriate lenders, explain the pros and cons of any mortgage deals you might be considering, and help you navigate the application process.

Defining Whether a Semi-Commercial Mortgage is Right for You

While it might seem obvious that some properties will be eligible for commercial, residential or buy-to-let mortgage products, the reality is that this isn't always clear-cut. There are many situations where applicants are turned down for borrowing simply because they have applied to the wrong lender or for a financing option that isn't suitable.

Examples include situations where the property is split by big percentages, such as 90% residential with a small workshop attached or a large building primarily used as a residential home but with one outbuilding used as a studio or production space. Assuming this property would be suited to a residential mortgage may be incorrect.

The general rule is that you'll need a semi-commercial mortgage if there are any elements of a business within the property – irrespective of how much of the floor space or percentage it comprises.

Semi-Commercial Mortgage Lender Policies

To add to the confusion, some semi-commercial mortgage lenders also apply their own policies and lending terms, making it worthwhile speaking with the Revolution team before you take any action to ensure you are fully informed. Variances between lenders can mean:

  • Some apply a policy called the 60/40 rule – if less than 60% of the property is used for commercial purposes, they’ll consider this a residential mortgage and work to the standards regulated by the FCA.
  • Others work on the basis of a financial split, requesting separate valuations of the different parts of the building. They might decide that the proportion of the premise that is worth the most dictates the type of mortgage lending they're prepared to extend.
  • Alternative lenders might use a different approach and will offer two separate mortgage products, each on a different proportion of the same building. However, this normally only works if you can divide the floorplans and have a separate entrance for each aspect of the property without any common areas.

As always, we'd recommend giving us a call or sending a message to work out which of the above apply or whether a lender you may be considering will use a different policy to evaluate the mortgage product that they feel is most appropriate.

Financial Considerations When Applying for a Mixed-Use Mortgage

Mixed-use mortgages can be a good way to raise the financing required to purchase a home and simultaneously buy a business premise either to trade from yourself or to let out to commercial clients or tenants.

Generally, semi-commercial properties as an investment perform well and often better than buy-to-let residences, with average returns of roughly 8.7% compared to 5.8% on the median buy-to-let.

It's also worth thinking about the maintenance and running costs. Most business tenants are responsible for general repairs and business rates, meaning that a larger proportion of the rental income is profitable.

Renting to a residential tenant tends to mean your expenses are higher since landlords are typically responsible for repairs, covering the costs of maintenance or replacing furnishings or appliances included within the rent.

However, it is also important to compare the mortgage costs and overall profitability alongside the slower capital appreciation normally associated with mixed-use properties, which tend to grow in value as a saleable asset at a slower rate than buy-to-lets.

Property Valuations for Mixed-Use Mortgage Applications

Lenders may wish to arrange an independent valuation to assess the bricks-and-mortar value of the semi-commercial property.

However, if you have a mixed-use building where over half of the value is allocated to buy-to-let residential accommodation, the lender may waive this requirement if they can see evidence that the rental income will comfortably cover the mortgage costs.

Other lenders will decide to offer a buy-to-let mortgage product for the entirety of the purchase or remortgage cost if they are happy the rental income is more than sufficient to offset their lending risk linked to the business element.

Although  depend on multiple factors, this could potentially mean you gain a more competitive interest rate.

Lenders may also offer perks like free valuations and cashback. These incentives can be attractive, but it's imperative you consult an independent broker before you move ahead. That's because some 'free' services conceal the fact that product or application costs are far higher than other lenders, so you need to have complete oversight of the overall costs and total repayments associated with a semi-commercial mortgage to have full control of your finances.

Eligibility Criteria for Semi-Commercial Mortgages

Another financial consideration is that some lenders will want to see a separate and minimum annual income, over and above the returns you might anticipate receiving from the commercial aspect of the building or the rental proportion where relevant. Not all lenders have this as a universal requirement, but some will need any semi-commercial mortgage borrower to prove an annual income of around £25,000 a year.

Minimum Deposits and Mixed-Use Mortgage Applications

Lenders will typically need to see a deposit (or equity if you're refinancing) of anywhere between 20% and 40% depending on factors like the amount of income you forecast generating from the property. If you have a lower risk profile, you'll normally be accepted with a deposit to the lower end of the scale, but applicants that present greater risk will need as high a deposit as possible.

There isn't any standard deposit we can indicate because, as with all of these requirements, it depends on the lender. However, some niche semi-commercial mortgage providers take a flexible approach and may be better suited if you don't have 40% of the property value available as a cash down payment.

As a rough indication of the norms in UK mixed-use mortgage lending:

  • Owner-occupier mortgages, where you intend to run your own business from the property, normally need a minimum 20% deposit.
  • Investors buying a mixed-use property will often be expected to have at least 25% as a down payment.

One factor here is that you can potentially borrow more as a total mortgage value if the borrowing comprises a lower proportion of the overall property valuation. For example, if you've owned a mixed-use property for some time and have built up equity, you may qualify for more competitive deals if your borrowing requirements amount to a smaller LTV of 50% or less than the property is worth on the open market.

Affordability Assessments in Semi-Commercial Mortgages

Like any mortgage application, a lender will need to assess whether they think you have the income and financial reserves to keep pace with your mortgage repayments. While commercial property mortgages aren't regulated like residential lending, the provider still needs adequate assurance that you are very unlikely to default and will take into consideration a combination of residential and commercial elements and the loan to value proportions.

In essence, that is because a repossession means a lender will need to sell the property at below market value through a liquidation sale. If they have a large amount of debt secured against the property, and it sells for a low price, they may make a loss.

Therefore, the lender will require several pieces of information before they can evaluate whether you comply with their affordability policies. That might mean looking at your projected income, working on the basis of EBITDA – earnings before interest, tax, dividends and amortisation.

However, your EBITDA can't be used as a rock-solid metric to determine how much you can borrow since other lenders will use alternative assessment methods.

All will need to see your operating figures and how you intend to make your semi-commercial mortgage repayments. A few years of trading experience can help, along with budgets to quantify the accuracy of your forecasts.

While new owners or landlords can apply for mixed-use mortgages, lenders will likely need additional information if you don't have an ongoing trading history. We can also look over your finances and forecasts to provide more information on how much you can borrow.

The Relevance of Credit Scores in Semi-Commercial Mortgage Applications

Along with affordability assessments, credit scoring is a standard aspect of any mortgage application. Lenders take different views of credit scores, and some will be less interested in your credit file, provided you have verified projections that showcase a reliable borrower with little risk of default.

Others have policies that dictate that any semi-commercial mortgage applicant with any adverse credit history will be automatically rejected. However, this tends to be more common with high-street and mainstream banks than semi commercial mortgage specialist lenders.

If you have bad credit or a low credit score, the solution is to consult a whole-of-market specialist mortgage broker to make independent recommendations. Some niche lenders focus solely on bad credit applicants. In contrast, others will not consider your credit score a primary factor when deciding whether to lend.

Semi-Commercial Mortgage Rates

The commercial lending market is vast, so rates and charges associated with semi-commercial mortgages vary greatly. Unfortunately, it is impossible to list the average rates since these are diverse, but we recommend any mixed-use mortgage applicant verify the associated costs in advance.

Like-for-like comparisons are important because semi-commercial mortgage lenders don't tend to publish rates and will decide the interest rate they are prepared to offer based on the specifics of each application. Semi-commercial mortgage rates will naturally be higher than those for a residential property mortgage, but a careful cost comparison can make a significant difference to your overall repayments over the mortgage term.

Researching the various options, comparing the rates available from lenders suited to your requirements, and checking the terms and conditions are all-important, and our commercial mortgage brokers can assist at any stage, alongside entering into negotiations to ensure you get the best possible deal.

Applying for a Semi-Commercial or Mixed-Use Mortgage

Both commercial and buy-to-let UK lenders may offer semi-commercial products, working on the basis of the rental, residential and commercial income or trading revenues from the business aspect of the property plus the value of the residential proportion. The application stage can be more complex than other mortgage categories since each property is unique, and a lender won't make standardised offers in principle without reviewing the details.

Interest rates on both residential and commercial mortgage products are a little higher than the norm for buy-to-let lending. Still, the value you can borrow may be significantly higher if the financials stack up.

However, complete oversight is very important, depending on the base rate at the time of your application, the maximum LTV lenders are accepting, and the fees linked to any mixed-use mortgage products you might be considering – these can start at around 1.5%, so are not a small expense.

Independent Support With Mixed-Use and Semi-Commercial Mortgages

We appreciate that semi-commercial mortgages are potentially complex products, with multiple factors and variables to consider before you make any decisions. You are welcome to get in touch with our team at any point, whether to compare semi-commercial mortgage offers, establish the right mortgage product for your property, or determine whether there are opportunities to reduce your borrowing costs.

You can send us a message, arrange a convenient time for a chat, give us a call at 0330 304 3040 or email [email protected] at any time for further information.

Almas Uddin
Almas Uddin

Founder and Mortgage Advisor

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Frequently Asked
Questions

Yes, shops and other business premises with a flat above are among the most common properties requiring a semi-commercial mortgage. As we've explained, the entrances will impact the most suitable mortgage.

Flats above shops that have independent entrances can be mortgaged separately as two standalone properties. However, you’d need a mixed-use mortgage to buy or refinance the property if the two parts of the building have shared entrances.

Lenders prefer applicants to have some experience either running the type of business concerned or renting commercial or residential properties – of course, depending on what they intend to use the property for.

Some mortgage providers will only accept applicants with a minimum level of experience, often ranging from six months to three years. Other lenders won't have any such requirements but will need to check carefully that you meet all the other eligibility criteria.

If you have a business plan or a full set of projections, this will assist with your semi-commercial mortgage application. There are numerous ways to utilise a mixed-use property, such as buying a business premise and letting out the residence, renting out both parts of the property, or letting the commercial unit while living in the other proportion.

Your selected lender will look at your figures to ensure the investment is sound and will generate a profit, so they'll ask for the following:

  • Projections and budgets
  • A copy of the business plan
  • Information about your business experience

Semi-commercial properties with an anticipated rental income of 190% of the monthly mortgage costs are often the minimum for this type of mortgage. However, if you’re buying a buy-to-let as a business asset, a lender might accept rental returns of around 130% of the mortgage repayments.

In any scenario, you'll need to show that the rent will reach 110% to 125% of the mortgage as a minimum threshold. However, other eligibility criteria apply, and the rental cover required by the lender might also depend on your tax bracket.

Working from home or running a business from your residence is becoming far more common, and we’re often asked whether that means a residential mortgage is no longer appropriate. Generally, you won’t need to remortgage onto a semi-commercial mortgage if you haven’t changed the property or made any modifications to make it suitable for business use.

Self-employed people often work from home and don't need to remortgage – instead, they can claim a proportion of the running costs as a tax-deductible expense.

However, this might change if you need to make modifications, such as building an outbuilding or creating a space specifically designed for a business that is not used for residential purposes.

The best way to verify your position is to contact your lender or get in touch with an independent broker who can provide further information. Most lenders will be happy to grant consent for you to work from home, which verifies your mortgage is suitable and won't need to be refinanced.

Potentially, yes. If you change the use of a building or alter a home into a business, you'll normally require planning permission. Change of use requires approval even if you don't make any changes to the appearance or layout of the property.

Mixed-use mortgage lenders may ask to see a copy of the planning permission if:

  • You intend to sell services or goods from the property.
  • Your premise will receive regular deliveries or visitors.
  • You want to advertise the business at your home address.
  • You’re running a business that requires a licence.

It’s also important to contact your insurer since you may need business insurance to safeguard any assets or inventory you store in your home – they won’t often be covered by household contents insurance.

Applicants running a business from home may not necessarily need a semi-commercial mortgage – we’ve explained this above in a little more detail. However, you may need to check with your lender to ensure you have the right type of mortgage for your property.

If you’ve not made any modifications, you're unlikely to need to remortgage since many people run small businesses from home or manage their admin or bookkeeping for a small business from their residential property.

However, we'd suggest taking out business insurance and checking with your local council whether they expect you to pay business rates. In most cases, business rates apply only to a proportion of the property used solely for commercial purposes. These costs may be tax deductible, including things like broadband, utilities and local council taxes, although this is best confirmed with an accountant.

An accountant can also advise if you are potentially liable for capital gains tax if you sell the property and a part of it is designated for business use – although this would be fairly unusual.

There are some scenarios when you will be obliged to remortgage to a semi-commercial product, either because your residential mortgage lender will not grant approval for you to run a business from the property or because the mortgage isn't a suitable option.

Other reasons to remortgage might be because it is financially advantageous. While commercial borrowing is generally more expensive than residential and carries higher interest rates, you may find that refinancing and repurposing part of the property for business use is considerably more cost-effective than buying or renting a separate building.

You might also find that building an extension or adding an outbuilding to run your business is the most viable solution, even if that means remortgaging. These solutions tend to be most suitable where you’re using 30% or more of your home for business use, in which case you may be eligible for a semi-commercial mortgage.

As always, we'd advise getting in touch for more information or to run through some like-for-like comparisons to see how varied options stack up.

Online mortgage calculators are handy tools if you'd like an indication of how much you're likely to be able to borrow, the minimum deposit required, and what the monthly costs may look like. However, we often reiterate that these calculators are generic and give you a rough idea – you shouldn’t make any financial decisions based on this information.

When you come to submit an application, you'll often find the rates offered, deposit requested, and other terms vary significantly from those displayed online since calculators can't factor in your credit rating, financial status and other elements relevant to the lender's eligibility assessment.

A far better option is to speak to a whole-of-market broker. We can ask a few background questions to get a more specific idea of what a lender might be prepared to offer – and which lenders are most likely to approve your application.

No – a semi-commercial mortgage is unlikely to be the best option unless you're operating a business from your home or using part of the property as a trading premise. Likewise, you can't apply for a business mortgage if you want to buy a property you intend to live in or have a living space within it.

Lenders will ask to review the property particulars and for some information about the business before they consider a semi-commercial mortgage application.

Changes in the way we work have meant a large number of people now run businesses from home. This trend is one reason semi-commercial mortgages have become in much higher demand and are available from a broader range of lenders.

Another factor is that landlords recognise the profitability of commercial buy-to-lets, particularly where changes to legislation affecting residential landlords and the expenses they can deduct from their income before paying taxes make this less appealing.

Mixed-use properties are treated as commercial investments for tax purposes, which means a landlord can reduce their tax liability by including the costs and mortgage interest in their accounts. They also do not need to budget for the 3% additional stamp duty levy payable against second homes, so there are several benefits.

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FCA disclaimer

The content included in our articles, blogs, web pages and news publications is based on information accurate at the time of writing. Note that policies and criteria can change regularly throughout the UK mortgage lending market, and it remains essential to contact the consultation team to receive up to date guidance. The information included on the Revolution Brokers site is not bespoke to any circumstances or individual application scenarios and therefore is not intended to be used as financial advice. The content we share is designed to be informative and helpful but cannot be relied upon to provide individual advice relevant to your mortgage requirements. All Revolution team members are fully qualified, trained and experienced to provide mortgage advice of an independent nature.

We collaborate with lenders and providers who are regulated, authorised and registered with the Financial Conduct Authority (FCA). Should you require specific mortgage borrowing types, some products such as buy to let mortgages may not be FCA regulated. The Revolution team can provide further information about regulated and unregulated lending as required. Please remember that a mortgage is a debt which is secured against your home or property. Your home can be at risk of repossession if you do not keep up with the repayments or encounter any other difficulties in managing your mortgage borrowing responsibly. This also applies to any remortgage or home loan secured against your property, including equity release products.

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