Semi Commercial Mortgage

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

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Semi Commercial Mortgage

Investment in mixed-use properties has enjoyed a surge in popularity of late. This informative article explains what such investments are, why they are in demand right now, and what you can expect when applying for a mortgage for one.

There are quite a few differences between commercial, residential and mixed-use mortgages, so understanding the contrasts is the first step to applying for the most suitable financing product.

What is a Mixed-Use Mortgage?

In layman's terms, a mixed-use property is a combination of a residential property (whether that be a buy-to-let or a standard home) and a commercial premise.

Some examples of mixed-use properties include an office, store or retail outlet with a domestic residence above it, all of which are included in the same freehold agreement.

Other examples include guest houses where the owners live and public houses above which the proprietor has a permanent residential address.

How Is a Mixed Use Mortgage UK Different From Another Loan?

Due to the commercial aspect contained within every mixed-purpose property, obtaining a mortgage for one requires the involvement of a commercial mortgage provider.

These providers generally assess individual applications on their own unique merits, giving more attention to the particulars of the specific situation than they might with a normal buy-to-let property.

This is largely due to the fact that there are a greater number of factors at play which they must consider, such as the specific kind of tenant lease that the commercial side of the investment will necessitate.

Despite the fact that mixed-use property investments demand a specialised type of mortgage, we can search among different providers who offer this specific product and locate the one that is best suited to your particular circumstances.

The following topics are covered below:

How Do I Know Whether I Need a Semi-Commercial Mortgage?

It isn't always obvious whether your property or a residence you're thinking of buying counts as semi commercial!

In most cases, if there is a commercial element (say a shop, workshop, business space or storage unit specifically for business use) - and part of the building is residential, then the answer is normally yes.

Many mortgage applicants mistakenly assume that it works on percentages, applying for whichever mortgage makes up most of the floor space, but that isn't accurate.

Even if you have 80% residential and 20% commercial or vice versa, it might still be treated as a mixed-use property.

However, that isn't a universal rule, so it makes sense to work with an experienced broker who can evaluate the most favourable solution and point you in the direction of the right lender!

For example:

  • Some lenders use a default 60/40 ruling. If they calculate that under 60% of the property is commercial, they will offer a regulated mortgage under the same FCA terms as a residential loan.
  • Others take a financial split, so they'll look at the valuation of each aspect of the property to determine which sort of financing they are prepared to offer.
  • Investors can commercial finance properties with two separate mortgages; one commercial and one residential. This option applies where each part has a separate entrance, so although both premises occupy the same building, they are not common areas.

Our advice is always to get in touch before you apply for any mortgage, as a specialist adviser with expertise in mixed-use property transactions will be able to clarify.

Are Mixed Use Mortgage Products and Semi Commercial Mortgages the Same?

They are, yes! It's easy to confuse mortgages because lenders and brokers might use different terminology for the same thing.

A semi-commercial mortgage and a mixed-use mortgage are the same - they mean a mortgage for a property split between residential accommodation and commercial floor space.

Why Are Semi Commercial Property Mortgages So Popular?

The government regards most mixed-use properties as commercial investments, which means landlords can take advantage of their profit and loss account by offsetting any costs incurred and loan interest accrued against it.

Mixed-use properties do not incur a 3% surcharge on stamp duty, which buy-to-let apartments with no commercial aspect do.

Is a Mixed Use Mortgage a Profitable Way to Invest?

To make them even more attractive, mixed-use property investments often perform better than residential buy-to-let properties.

At present, mixed-use properties generally return around 8.7% on average, while a standard buy-to-let property is only capable of an average yield of 5.8%.

Moreover, the associated upkeep and maintenance expenses are generally lower in a mixed-use property.

This is because tenants of a commercial property are regarded as responsible for taking care of any repairs or other maintenance works. In contrast, the tenant would expect a residential landlord to undertake these tasks (or contract responsibility to a letting agent).

On the other hand, you should remember that mixed-use properties can be much more complex when quantifying their rate of capital growth, despite the higher yields.

This is down to the fact that determining a valuation for mixed-use properties takes in a greater number of factors than a standard buy-to-let property.

How Can I Apply to Semi Commercial Mortgage Lenders?

As mentioned above, You can only obtain a mortgage for a mixed-use property investment through a commercial mortgage lender.

They will then calculate the cumulative rental income of both the commercial facet and the buy-to-let residence to determine how much borrowing capital you will be able to access.

Because the interest rates for commercial and semi-commercial mortgages are slightly higher than those for standard buy-to-let properties, the amount of money available to you may be significantly different.

However, this difference might not be as pronounced as expected, with certain commercial mortgage lenders offering variable rates beginning at 3.24% over the London Interbank Offered Rate (LIBOR), with a loan-to-value (LTV) ratio of 55%.

Meanwhile, the fees imposed on individual products typically begin at around 1.50%, which is added to the overall value of the loan itself.

In any case, each commercial mortgage lender will offer a varied range of options, so it’s a good idea to discuss your unique needs with your broker so that they can help you to find the best product for your circumstances.

Is a Mixed Use Mortgage UK Appropriate for a Flat Above a Shop?

Flats above shops are a common feature across the UK and one of the typical scenarios where a mixed-use mortgage may be suitable.

It depends whether the flat and the shop have independent entrances, or you have to use one part of the building to access the other.

Where the residential tenant needs to go through a shop to get to their front door, you will need a semi-commercial mortgage.

However, it might be worth applying for a residential mortgage for solely the residential element of the building if that flat has a standalone entrance that isn't connected to the shop.

Some mortgage lenders will treat this as a non-standard property, so they might refuse to lend or charge higher interest rates. In contrast, niche lenders will normally be comfortable accepting an application.

How Will Mixed Use Property Mortgage Lenders Value My Building?

In certain situations, where the buy-to-let aspect comprises over half of the freehold value, and the rental income is sufficient to meet the repayments of the mortgage, some mortgage providers will waive the commercial part of the property altogether and offer a product based solely on the residential component.

The primary advantage of this arrangement is that you can access a slightly reduced interest rate, with some providers offering mortgages that begin at 2.95%.

There is also a range of other incentives, including free valuations, cashback offers and other perks intended to sweeten the deal. We can connect you with these mortgage providers if that is an avenue you wish to pursue.

Regarding minimum income requirements, some providers stipulate that all applicants must earn a minimum of £25,000 per annum. Others only require one, which is sufficient to meet repayments and equipped to withstand any downtime or void periods.

Do I Need Previous Experience to Apply for a Semi-Commercial Mortgage?

Because mixed-use property investment is, by its very nature, a more complex animal than standard buy-to-let investments, most mortgage providers will demand that you have at least some experience in the latter before approving an application for the former.

This experience requirement can vary between six months and three years, depending on the mortgage broker's provider.

What Are the General Eligibility Criteria for a Semi Commercial Mortgage?

Every lender has a range of policies and lending guidelines that determine their requirements, but the typical eligibility criteria for most semi-commercial mortgage products will look at:

  • Affordability
  • Deposit value
  • Credit score
  • Trading experience
  • Investment value

We'll run through each of these factors below to explain what a lender needs to know and why that impacts the likelihood of mortgage approval.

How Does Affordability Work on a Mixed Use Property Mortgage?

Affordability assessments are a part of any mortgage application - the lender is verifying whether you have the finances and income to keep up with the repayments.

It's essential; because a lender won't risk lending to someone where they think there is a strong possibility of ending up in a repossession scenario and being unable to recoup the outstanding debt.

Semi-commercial lenders will evaluate projected income by calculating earnings before interest and depreciation (EBITDA).

Unfortunately, there isn't a common rule that means you can use your EBITDA to assess how much you can borrow, and it's all down to your chosen lender and how much you'd like to borrow.

The key is to show a strong operating performance that will cover the monthly repayment comfortably.

Supporting information can be useful, especially if your business is relatively new or you haven't had a great last few trading years.

High street banks normally have a proprietary semi-commercial mortgage calculator, so Revolution can take a look at your finances and give you an indication as to what each mortgage provider will likely offer.

What Deposit Do I Need to Apply for Semi Commercial Property Mortgages?

The minimum deposit for a semi-commercial mortgage falls into the same range as for a commercial mortgage - lenders will need at least 20% to 40% as a down payment.

Applicants that pose a low risk can usually offer a smaller deposit, whereas a lender will require more if any factors mean they need to offset their exposure.

Exact deposit minimums vary slightly between owner-occupier and commercial properties, so all is not lost if you don't have a 40% deposit available!

  • Owner-occupier business mortgages are designed for companies buying a property to work from. The maximum Loan to Value (LTV) is normally 80% - so you'll need a 20% deposit.
  • If you're buying a property as a commercial investment, the LTV tends to be capped at 75% so a lender will require a higher 25% average minimum.

Depending on the circumstances, it is possible to secure a mixed-use mortgage with a higher LTV ratio. The lender might consider this if you have additional security to offer, such as another asset or property you own (with sufficient equity).

Does My Credit Score Matter in a Mixed-Use Mortgage Assessment?

Credit scoring is a standard part of a mortgage application, but lenders have widely varying stances on approaching bad credit, especially for semi-commercial products.

Some lenders are very strict and have guidelines that say they won't lend to any applicant under any circumstances if they have any issues with their credit report (although this usually applies more to mainstream banks).

More niche lenders and those specialising in commercial mortgages will often be more flexible and look at other criteria without necessarily refusing a bad credit applicant.

It's important to note that the mortgage market is huge, and a whole-of-market broker can recommend lenders you may not have come across before with more suitable products to fit your borrowing requirements.

There are also niche lenders who focus on lending to applicants with low credit scores or adverse reports on their credit history. The lending terms and interest charges will often be higher, but a bad credit score doesn't mean you won't qualify for any mortgage.

A lot depends on the credit issues on your report and how long ago they occurred.

Minor problems such as a late payment won't be as big an issue. Likewise, a small amount of debt from several years ago isn't normally a stumbling block.

Severe issues such as bankruptcy or repossession can be trickier, and it's normally necessary to work with a specialist bad credit lender.

What is the Best Way to Evaluate Investment Potential Before Applying for a Semi Commercial Mortgage?

Most applicants interested in a semi-commercial mortgage are looking to make a business investment, whether renting out both parts of the property or buying a business site with a residential rental unit attached.

Before applying for a mortgage, every investor should crunch the numbers and make sure they are confident that the investment is viable.

Lenders will perform the same exercise, so they'll ask for:

  • A copy of your business plan.
  • Details of your trading history and track record.
  • Future projections.

A lender might expect to see a forecast rental income of 190% of the mortgage repayment (or interest-only) costs in a commercial investment mortgage scenario.

If you are investing in a buy-to-let as a business, a lender may need to see a projected income of 130% of the mortgage costs.

The minimum rental coverage you'd need to demonstrate for any semi-commercial mortgage is usually between 110% and 125% - although your taxation position and other eligibility criteria will come into play.

Do I Need to Refinance Onto a Mixed Use Property Mortgage if I Work From Home?

More and more people have started working from home or launched their own businesses in the past couple of years, and we receive lots of enquiries from concerned homeowners unsure how this affects their mortgages!

As a rule of thumb, you can stick with an existing residential mortgage if you haven't made any alterations to your home.

You can work from home and apportion the running costs to claim the expenses of operating your business through the usual tax return system.

If you need to create an additional room to run your business from or modify the property, you likely need a mixed-use property mortgage.

It's all down to whether there are parts of your home designed and used specifically for commercial reasons or whether you use a part of a residential property to conduct business activities from time to time.

We'd also recommend contacting your mortgage lender either way because you might need consent. They can also confirm approval and acknowledge that you are working from home, which means you'll have confirmation that your existing mortgage is sufficient.

Are Semi Commercial Mortgages Suitable for a Residential Property?

No - a semi-commercial mortgage is designed for buildings with a blended use of residential and business. You can't use a business mortgage to purchase a property used as a living space.

Likewise, a residential mortgage is not suited to business property or a building where part of it is designated for business use.

You'll need to show that at least some of the property is allocated to running a business if you'd like a semi-commercial mortgage.

Do I Need Council Permission to Use a Mixed-Use Property Mortgage UK?

Potentially, yes - there are planning considerations if you have a residential home and want to make changes to cater to running a business.

You may require a change of use (even if you aren't making structural changes), normally if you are altering the core purpose of a part of a building that is currently solely residential.

If any of the below apply, it's worth speaking to your local planning office:

  • You will be selling services or goods to customers from your home.
  • You expect a regular influx of visitors - including deliveries.
  • You intend to advertise your business outside of your home.
  • You need a licence to run your business or trade from your premises.

There are a few other considerations - you might need to contact your insurance company because a homeowner policy isn't likely to cover business assets.

Will Running a Business From Home Impact My Eligibility for Semi Commercial Mortgage Rates?

The first thing to do is to check whether your mortgage agreement includes any clauses or terms that forbid you from running a business from home while under that mortgage contract.

If you haven't altered the property, it's unlikely you'll need to remortgage if you're working from home or dealing with the admin for a small self-owned business.

Although it's always wise to check with your lender, there are a few other tasks you'll need to tick off:

  • Buying a business insurance policy. Home insurance will not cover anything related to your business, particularly if you purchase anything (like a laptop or mobile) in the name of a registered company.
  • Verifying with your local council whether you need to pay business rates on the commercial element of your home. Again, unlikely if there isn't a designated commercial aspect of the property, but essential to confirm.
  • Calculating or asking your accountant to check which of your property costs is tax-deductible if you are self-employed. Most people who run a business from home make claims for a proportion of heating, lighting, council tax and broadband. If you have anything specifically for the company, like a phone line, it's usually fully tax-deductible.

Note that you might be liable for Capital Gains Tax on a proportion of the value if you decide to sell your home, and part of it is allocated as a business asset or used as a business premise.

When is it Worth Remortgaging Onto a Mixed Use Property Mortgage?

In some cases, you might have little choice but to refinance onto a mixed-use mortgage because your existing mortgage won't permit you to operate a business from the property.

Others might mean that it is in your interests to remortgage.

The main reason homeowners need to switch to a semi-commercial from a residential product is that their business grows or they need to make substantial changes.

If, for example, you built an extension because you don't have the capacity to operate a business from your property as-is, you're creating a separate, new area of floor space within your boundaries designated for business use.

That doesn't always mean you must apply for a semi-commercial mortgage (as we explained earlier), but a broker can run through the figures and like-for-like comparisons to work out which option is favourable.

Much depends on your lender - as a basic guideline, if over 30% of your residential home is used for business purposes, it may qualify for a mixed-use mortgage.

How Can I Get the Best Semi Commercial Mortgage Rates?

With such a vast commercial lending market, the rates and interest you'll pay on a semi-commercial mortgage vary greatly between lenders.

It's impossible to check the interest rates available in advance because, unlike residential mortgages, most lenders don't publish rates tables. They'll make an offer to each approved applicant on a case-by-case basis.

The rates you pay depend on the strength of your application, the associated level of risk and the values involved.

Most semi-commercial mortgages carry a higher interest rate than a residential mortgage. Still, you can considerably improve your costs by putting your application together carefully and working with an independent broker.

Are Semi Commercial Mortgage Rates Available Through a High Street Bank?

Mainstream banks can offer commercial and semi-commercial mortgages - although most specialise in residential home loans, so the rates might not be the best out there.

We recommend contacting the Revolution Brokers team even if you have found what looks to be a great deal through your normal bank - specialist lenders and those that offer products exclusively to their brokerage network might be substantially more attractive!

Is a Semi Commercial Mortgage Calculator Accurate?

Like every mortgage calculator, these tools are there to give you a rough idea about what you might be able to borrow, how much deposit you'd need to put down, and the anticipated monthly costs.

However, they are far from accurate and only there to help you get an estimate rather than a precise mortgage quotation.

Every lender has a different calculator (often in-house, not published on their website) so whatever terms or costs you see are subject to change when proceeding with an application.

A mixed-use mortgage calculator works on averages, and it won't know anything about you, your finances, or your property.

What is a Better Option Than Relying on a Semi Commercial Mortgage Calculator?

The best way to get a reasonably specific idea about your borrowing options and all the figures involved is to work with an independent, whole-of-market broker with expertise in semi-commercial lending.

Picking the right lender and negotiating your terms is much more involved than selecting between the limited products advertised on a price comparison site - and you'll almost always get a far better deal as a result!

How Can I Make Sure I Have the Best Mixed-Use Property Mortgage UK?

The key is to do your research before you apply and work with a skilled broker who can offer impartial guidance at each step of the application.

It would help if you had a lender likely to approve your application within their criteria, a compelling application without any significant risks, and negotiation to ensure you get the best mixed-use mortgage rates.

Will Mixed Use Property Mortgage Lenders Consider Landlords Without Experience?

Commercial and semi-commercial lending relies on a wide scope of variables. It is undoubtedly more difficult to secure a competitive mortgage if you are a new business or trying to borrow against your first investment with a business and residential element.

Specialist lenders may cater to new businesses and potentially put together a bespoke offer depending on the available deposit and other variables.

Expert Support Finding the Best Semi Commercial Mortgage Lenders

If you have any further questions about the information we'd run through here, please get in touch with Revolution Finance Brokers at your convenience.

You'll find all the ways to send a message or give us a ring on our Contact page, and we'll be sure to put one of our mixed-use mortgage consultants in touch to chat about your requirements and offer independent guidance to get the ball rolling.

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How does our broker-matching service work?

A semi commercial mortgage is an appropriate product to finance the purchase of a building that has parts used for residential purposes (e.g. a flat) and others used for business purposes (e.g. a shop).

Examples include:

  • Apartments or flats above a shop, retail space or cafe.
  • Houses split into a salon and a residence above.
  • Residential flats in the same building as a bar, gym or shop.
  • Homes connected to a dentist's surgery or an office.

If the residential and business parts of the building share a common entrance, it is a semi-commercial property.

Yes, commercial mortgage brokers can provide insights into the most suitable lender and terms. Still, you can apply for a mixed-use mortgage if the property you wish to buy or refinance falls into the semi-commercial bracket.

Lenders tend to prefer applicants with prior experience operating a mixed-use or commercial property. You can apply as a company or individual investor if your business is run on a self-employed basis.

Semi-commercial property valuations can be complex because some lenders will value the premise like a buy-to-let investment - i.e., they'll consider the projected rental income and compare that to your monthly mortgage cost.

Others will value the property as a brick and mortar building and assign a valuation depending on similar sales values in the local area.

No, commercial mortgages are unregulated and are not suited to residential homes. However, if you want to buy a property split between residential and commercial use, a mixed-use mortgage may be the best solution.

Any semi-commercial lender will not consider the application if there isn't some element of business floor space within the unit.

Costs vary considerably depending on how much you wish to borrow, the valuation, the lender, and other circumstances.

As a rough idea, the lowest semi-commercial mortgage interest rates start at about 2.5% above the base rate. Lenders tend to charge arrangement fees from 0.75% to approximately 2.5% of the loan value.

You will also need to budget for survey charges and legal fees as a minimum.

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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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