Semi Commercial Mortgage Guide
Discover all you need to know about semi-commercial and mixed-use property mortgages.
Wondering how a semi-commercial mortgage works? Find out and get answers to all your questions with our expert guide.
If you are looking to buy a property that has a business part and a residential accommodation part, you may have heard the term ‘semi-commercial’.
But what exactly is semi-commercial, and how does it affect your finance options? Our guide will explain this and more, plus how to get the best deals.
What does semi-commercial mean?
The term semi-commercial relates to how a property is being used.
A commercial property would be a shop, or an office, or a warehouse for example.
A semi-commercial property is any commercial property that also includes residential living space.
It is a combination of business use and private use. This could be a shop with a flat above or a restaurant with living accommodation.
While a property’s use class is stipulated by the Local Authority, the type of mortgage needed will be defined by how you will be using the property.
This will show up on the conveyancing searches, but when the surveyor visits to conduct a valuation they will also report back on the layout and any residential elements.
Semi commercial mortgages
What are they and how do they work
Semi-commercial mortgages and mixed-use mortgages are suitable for businesses or individuals who want to purchase a property that has both commercial and residential components.
They can also be used to refinance a property already owned, much like a residential remortgage.
A lender needs to know how a certain property will be used. They can then decide on the risk profile this poses and the terms for lending.
Different mortgages could be needed even though the property is exactly the same each time!
To illustrate this better, let’s take a standard 3 bedroom semi-detached house:
- If you use this as your own home then you will need a: standard residential mortgage.
- If you permanently let the property out using an AST you will need a: buy to let mortgage.
- If you don’t live in the property but let it out as a full time airbnb, you will need a: holiday let mortgage.
Remember this is the SAME property.
Now, if you live in this house but convert the garage so that you can run a business as a therapist, it will then require a semi-commercial mortgage.
These types of loans are assessed in a similar way to commercial mortgages, so you will need to apply to a commercial lender to get one. The commercial component means that these applications are looked at on a case-by-case basis. Each one needing to win over the underwriter and prove that it’s a worthy candidate.
Mortgages are available for owner occupiers and also property investors, although the terms offered will differ for each one.
Charges and security
As with other types of mortgage, a semi-commercial loan will be secured against one, or more, properties. The lender will take a legal charge, securing the debt against the property. As a last resort this will enable the lender to apply for a repossession order so that they can sell the property to repay their debt.
In some cases a lender may ask for a Personal Guarantee (PG) from the borrower/s. If this happens it is important that you seek legal advice before agreeing. Essentially this means that the lender can pursue you personally for unpaid debts and costs relating to the mortgage.
What is a mixed-use property?
A mixed-use property has both residential dwelling and commercial within the one building.
It is a ‘mix’ of private living space and commercial, business space.
Some examples would be an office or retail shop with a residential flat above, all of which are under one freehold title. Or perhaps a pub where the owner has their own private accommodation above.
Sounds very much like a semi-commercial property to me?
Spot on!
They are one and the same thing. Slightly different terminology for the same mix of commercial and residential.
Commercial building with flats
Owner-occupied guest houses
Holiday parks with owner accommodation
Shops with flats above
Restaurant with flats above
Pubs with accommodation
Some home based businesses
Kennels & catteries with accommodation
Which mortgage do I need?
If you are buying a freehold property that has a commercial element plus residential accommodation, it will be classed as mixed-use and needs a semi-commercial mortgage.
Some borrowers mistakenly believe that the definition works on a percentage basis. So if 25% is taken up by a workshop or storage unit and the remaining 75% is a private home then this should be OK for a standard mortgage.
Unfortunately this is not how it works.
Don’t forget that all buildings and houses need to have a ‘use class’ from the Local Planning Authority. This defines what the properties may be used for.
The type of mortgage you apply for, and the lender it is with, needs to align with the legally defined usage for the freehold property. If not, your application will be rejected.
It’s not always cut and dried though. There will always be properties that are harder to define than others. These will need a little more investigation prior to making a final decision on finance.
Eligibility criteria and deposits
Every lender will have it’s own list of requirements, but here are some general guidelines.
Loans from £25,000 with no upper limit
Minimum age 18, no maximum
Available in England, Scotland, Wales
Adverse credit considered
Repayment or interest only
Fixed or variable rates
Terms from 5 years to 30 years
All property types considered
Special Purpose Vehicles (SPV) acceptable
Affordability
Any lender will want to understand your current and projected income, as explained in your business plan.
Affordability will take account of the business income and also your own personal income situation. (less outgoings of course).
The key is to show a strong and stable revenue position, to give the lender confidence in your ability to service the loan.
Deposit
Your cash deposit needs to be around 25-40% of the purchase price. This gives a loan to value range of 60-75%.
Lenders have their own rules regarding deposits, and the amount needed will be influenced by the property, your proposed use and your experience and credentials.
Certain higher risk businesses, such as nightclubs, bars and pubs, will normally require the larger deposits.
Credit status
As with other types of mortgages, to get the very best deals you have to have the best credit status.
A clean credit report demonstrates to lenders that you are a responsible borrower and that you are likely to repay the loan.
If you do have any bad credit, don’t despair, a specialist broker will be able to match you to an appropriate lender.
Your proposal
To achieve the very best rates you will need to have either commercial property experience, or have owned more than one buy to let property for at least two years.
You will need to submit a comprehensive business plan, which will detail your projected revenues, operating costs and style of business.
Your broker should be able to offer some tips.
How to apply
Applying for a mixed-use mortgage requires careful planning and thorough preparation.
These types of mortgages are viewed more from a commercial lens, so the application process is more flexible, albeit a bit more complex, than a standard residential mortgage.
You will need to do quite a bit of groundwork early on, and to write a compelling business plan that explains how your commercial project will succeed.
Who you apply to will largely be governed by the freehold building style and construction plus the type of business setup.
There are many variables that will be affected by LTV, experience, location, whether you are an owner-occupier or investor.
It is essential that you work with an experienced commercial mortgage broker who can take you through each step, making sure your proposal is as robust as possible.
What are the fees?
The fees will reflect that your property has a commercial element to it.
Lender fees: Lenders will charge 1-2% of the loan amount as an arrangement fee. This is usually paid on completion but can be added to the loan if needed.
Valuation fee: The fee you pay will vary according to the property value, type and location. This fee needs to be paid upfront and won’t be refundable once the valuation takes place. You may also need to budget for a more in-depth survey should you want the structure inspected.
Broker fees: Most brokers will charge for arranging commercial and semi-commercial finance, there’s lots of work to do! The fee will generally be 1-1.50% of the loan amount.
Legal fees: You will need to employ a solicitor to handle the purchase side and also the commercial mortgage. Most solicitors ask for an initial ‘payment on account’ once you instruct them to start work.
What documents are required?
Here are the basic documents needed when you apply, there maybe additional types depending on the property or lender.
- Proof of ID and address
- Evidence of personal income/assets
- 3-6 months personal bank statements
- 3-6 months business bank statements
- 2 years business accounts
- Relevant leases or rental agreements/AST
- Business plan
How long does the application take?
This is a difficult question to answer.
It depends!
There are so many variables and nuances with mixed-use properties that applications can take many weeks. These types of loans are not assessed by a computer, but by real underwriters, who want to understand the risk they may be taking on.
As with all finance applications, the more effort you put into the preparation, the smoother the process should be.
Your commercial mortgage broker will be able to help you get all of the initial documents and information together. They can also advise on the lenders processing times, as these vary.
You should allow 6-8 weeks for the mortgage to be processed.
How to get the best deal
Lenders will always offer their best deals to borrowers with the strongest credit profile and the highest deposit.
These are lower risk borrowers.
Semi-commercial mortgages are complex arrangements and they require advice and guidance from someone experienced in this field.
Although some of the high street banks do offer mixed-use mortgages, you will find many more lenders via a commercial mortgage broker.
There are no advertised rates to compare, each deal is priced on its own merits and circumstances. This means that lending rates and terms can be hugely different between lenders.
An experienced broker will know who’s most likely to offer you a great deal.
Speak to a specialist
Let Respect Mortgages put you in contact with an award winning commercial mortgage broker, who can help you wherever you are in the UK.
They deal with all lenders, both large and small, giving you the maximum amount of options.
Fully FCA regulated, they have more expertise across more lending solutions than any other broker and have specialist teams in place to work with clients through every stage of their journey.
For a free no obligation discussion, please call us on 0330 030 5050 or tap the button below.
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FREQUENTLY ASKED QUESTIONS
While lenders usually prefer a longer trading history, it’s possible for start-ups to secure semi-commercial finance. They may not have the most competitive terms, as a new business is a higher risk.
This can sometimes be an option if each property has its own entrance. It will depend on the size of each unit and how the ownership is registered.
Even with a less-than-perfect credit history, semi-commercial mortgages are not out of reach. There are lenders that accept a small amount of bad credit, your mortgage broker can find the right one for you.
If you are working from home or just have a home office then a normal mortgage will normally be acceptable.
Where there’s a dedicated space, and perhaps your customers come to your house, the this is most likely to be classed as mixed-use. Examples of this would be a chiropractor, therapist or teacher who undertake paid work in a set space.
The loan to value, or LTV, is a percentage that represent the loan size, when compared to the property value.
A good majority of lenders will offer a maximum LTV of 75%. But these can be adjusted depending on the risk posed by each borrower. For really good deals a lender may go to 80% LTV.
Commercial lenders will require a deposit of around 25%, and don’t offer higher LTV mortgages. The only way to buy a mixed-use property without a deposit is by borrowing against another property that you own.
This generates the 25% cash deposit needed on the new commercial purchase. This is effectively a 100% semi-commercial mortgage, split over 2 properties. Commercial lenders can also cross-collateralise loans over more than one property, enabling you to borrow more from just one lender.
This is certainly possible and is a popular option for many business owners.
Where you live in a semi-commercial property the lender needs to arrange the mortgage as FCA regulated. This is because it puts your main residence at risk. It does have the effect of reducing the number of lenders and we would always suggest working with a broker to ensure it is structured correctly.
Obtaining funding for a mixed-use property takes a bit more effort when compared to a standard mortgage.
But the expert brokers that we work with can help most people. If you have approached your own bank and been refused as you don’t meet their strict criteria, a commercial broker can reach out to more flexible lenders. Each deal is assessed on its own merits and solutions are also available for: SPVs, expats, foreign nationals and first time buyers.
There’s a few different reasons why an investor may choose a mixed-use property:
- The yields are much better than standard buy to let
- It can help to diversify a portfolio
- Having more that one tenant de-risks the revenue/void situation
- There’s a possibility of converting or changing the layout at a later date
- Semi-commercial properties are exempt from the 3% stamp duty surcharge
UK mortgages and loans are regulated by the Financial Conduct Authority, or FCA. https://www.fca.org.uk/
They provide consumer protection where a mortgage or loan could affect your main residence, where you normally live. This means that a buy to let mortgage, holiday let mortgage or commercial mortgage are not regulated, as you would not live in these properties.
A semi-commercial property is slightly different.
Because you could live in the accommodation part, if you wanted to.
If this is your intention then the mortgage will need to be regulated. You will find that there’s a smaller number of lenders offering these but your broker can explain the options.
