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 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 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 mortgage rates 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.
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 specialist lenders.
If you have bad credit or a low credit score, the solution is to consult a whole-of-market 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 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 brokerage team 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 lenders may offer semi-commercial products, working on the basis of the rental 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 commercial and semi-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.
2023-05-09 
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