Buying a flat above a commercial business or shop has its benefits as they are cheaper than normal flats. But getting a mortgage for a flat above a shop can be more difficult because the type of shop will affect the available lenders.
Some lenders consider these properties to be too risky and will not accept mortgage applications for them at all. If the flat is self-contained and above, or next to, a commercial property then you stand a good chance of getting a mortgage.
Can you get a mortgage on a flat above a shop?
Yes you can, and they are available as a moving home mortgage, buy to let mortgage and holiday let mortgage.
Ideally, the flat will be self-contained, with it’s own entrance and leasehold, with a long lease term remaining.
There are a good number of lenders to choose from. However, the type of shop underneath the flat is crucial to successfully applying for a mortgage.
Business types that create noise, smells and operate anti-social hours are the less desirable and will reduce the number of lenders.
The key to getting a great deal is to work with an experienced whole of market mortgage broker, who will have over 100 lenders to pick from.
The main issues
While not every lender is willing to help, there are a good number of standard, and specialist, lenders to choose from. However, the choice of lender is limited due to concerns over the resale value of the flat should it be repossessed.
Flats above a shop or commercial premises, could be harder to sell because of:
- Noise
- Anti-social behaviour
- Smells
- Increased risk of fire
At some point in the future there is also the possibility that the use of the shop changes, and it then becomes a problem for the flat occupants. The flat will also be owned as leasehold which could cause the lender further problems towards the end of the lease term.
In short, these flats have an increased risk of being adversely affected by the activities of the shop underneath. This could either mean disruption and nuisance for the people living there (possible tenants) or great difficulty in getting a good sale price should the flat ever be repossessed.
Types of commercial property
The shop part of the building is classed as a commercial property. The type of shop, and what they do, is a vital part of applying for a mortgage on a flat above a shop.
We have a more detailed list below, but the main types are:
- Class B – Industrial and storage/distribution
- Class C – Hotels, homes, HMO
- Class E – Commercial, business, and service
- Class F – Learning and community
- Sui Generis – Everything else!
As well as the permitted Class, the lenders will be looking at:
- The length of the lease
- The title deed
- Shop operating hours
- Adjacent shops
- Access and security
How much can you borrow?
The maximum amount you can borrow will be determined by your gross earnings and your affordability.
Mortgages are available up to 4-5 times your gross income, sometimes even a bit more. But with fewer lenders to choose from, you may not be able to borrow as much when compared to buying a standard flat.
Options are available to employed people, self-employed, sole traders, company directors and CIS workers.
But the final figure will be affected by what income you can prove and your existing financial commitments.
What will the repayments be?
The monthly mortgage repayments will be influenced by the size of the mortgage, the interest rate and the mortgage term.
The interest rates for flats above a shop will normally be higher than on other standard properties.
To get a quick overview of the monthly payments we have worked out the cost for some different loan sizes.
Such as £250,000, £400,000 and £750,000 etc
Mortgage calculator
Our mortgage repayment calculator gives you a good idea of what your monthly mortgage payments might be based on the interest rate chosen.
Enter the amount of mortgage needed, the interest rate and select one of the repayment types to find out how much you will have to pay back each month.
You can then see how much mortgage you can afford.
Additional challenges
As we have mentioned above, the lender will be concerned about recouping their money in the event of repossession. This concern applies to all mortgages and all properties, but with homes next to commercial property, they take extra special care to do their homework.
Whilst initially, they may seem happy with the situation, this can change once the property has been valued and their surveyor has visited the flat and properly assessed their risk. It could be that the surveyor now determines that the risk is higher than first thought.
This could mean:
The loan to value is lowered
For residential houses that a lender perceives to be very low risk, they could be willing to offer 90-95% as a loan to value percentage. This figure reduces as the level of risk rises. To lower their risk on a flat above a shop, they may only offer to lend you 75% of the purchase price. This means that your mortgage deposit now needs to be 25%.
The flat is down valued
When the surveyor visits the flat he can thoroughly assess the accommodation you wish to buy and also the commercial business below and next door to the flat.
The business activities being carried out need to align with the banks lending policies for shops. But a surveyor’s job is also to confirm the correct valuation for a specific property. In rare cases it is possible for a valuer to believe that a flat is over-priced, when compared to similar flats over similar shops. They will then ‘down-value’ the flat. This means that if you still want to buy it you either need to negotiate a lower price, or put in a bigger deposit to make up the short fall.
The application is refused
This could happen if the surveyor feels that the structure of the flat, or the shop, is dangerous or has structural issues. It’s also possible that he finds out that the shop is running as a business that the lender’s policies don’t allow for. Anything outside of this policy will be refused.
What the lenders say
Flats above business premises
These can be considered subject to valuer’s comments.
Properties which are above, adjacent or near to commercial premises may be acceptable subject to the following:
- flats over commercial premises must be in separate ownership to the commercial premises
- the proximity of the commercial use must not affect the quiet enjoyment of the property
- consideration should be given to the location of the property
- the property must be located in a desirable area with good demand, readily saleable and readily marketable, for example properties which are adjacent to, or in very close proximity to a public house, night club, petrol station, laundrette, pet shop or hot food takeaway where the method of cooking is likely to cause smell or fumes would not be deemed as suitable security.
- Properties located above convenience stores / small supermarkets are acceptable.
Any residential security must have a suitable access, which must not be through a business premises.
Where the intended security is a flat situated adjoining or over the premises, the business property cannot be owned by the same person as this would have legal implications in the event of repossession.
Property types – acceptable
In all the examples below the valuer must confirm saleability and suitability for mortgage purposes, if they can then we can consider lending against the following:
- No-fines concrete construction (exceptions apply)
- Steel framed houses (exceptions apply)
- Flats over or immediately alongside business premises
- Freehold flats – where it is possible to enforce positive covenants. Before considering lending against this type of property, we rely on the valuer’s recommendations and the solicitor’s confirmation that the property title is good and marketable
- Agricultural restrictions – the maximum LTV will usually be 50% but each case will be assessed on its own merits
- Properties used for business – we can only lend if the property is primarily for residential use and the work area of the property is 20% of the total property area or less
- Leasehold properties – there must be at least 30 years left on the lease at the end of the term (we may consider less for properties in central London). Properties with lease lengths below 80 years at application should be discussed with your BDM before submission
- Flats (on any level) in multi-storey type properties are usually acceptable, subject to exceptions e.g. where the valuer identifies issues with the building and/or locality which are likely to adversely affect resale
Commercial property close by
We can lend against residential properties with commercial properties close by, subject to the valuer’s comments that the property is suitable security.
Holiday Let Non-Standard Products
In the following circumstances, non-standard products apply:
- Annual income below £20,000
- Applicant is a Trading company or an LLP1
- Occupancy restrictions apply
- Top slicing of background income required to meet shortfall at stressed rate (or pay rate if 5 year fixed) 2
- Some or all of the funds requested are to raise capital for injection into another business venture (including but not exclusively property development)
- Funds to be used to consolidate debt of £25k or more
- Applicant does not own a residential property
- The HMLR title includes up to 3 letting units
- The property sits above a commercial property (eg a flat above a shop)
Commercial Property – near or adjacent to
Accepted – subject to surveyor’s comments that the property and location does not adversely affect saleability.
The property is situated above a shop/commercial property, is it suitable for a mortgage?
There are no specific restrictions although some commercial uses may have a detrimental effect on saleability and every case is viewed on its own merits. The following guidance may be helpful:
- Any residential security must have a suitable access, which must not be through a business premises.
- Caution must be exercised where the title of the residential property has been separated from a larger title that includes commercial activity, particularly when this has been done specifically for the purpose of the proposed mortgage. This can sometimes lead to an unusual residential property that may suit the proposed applicants but would be more difficult to sell on the open market. The residential security must meet the general principles regarding saleability.
- The property must be self-contained, with its own private facilities and separate services.
Buying the shop and flat together
In some ways, this option is more straightforward than buying just the flat.
As a business owner, you might be interested in purchasing a property that combines your business premises with living accommodation. This can help save time and money by consolidating your work and home life under one roof. Alternatively, you could rent out the flat to offset the finance costs.
If you want to buy the shop and the flat above together, then you will need to purchase the freehold of the building. This can be financed by a semi-commercial, or mixed-use, mortgage facility.
What is a semi-commercial mortgage?
A semi-commercial mortgage, also known as a mixed-use mortgage, is a type of loan specifically designed for freehold properties that have both residential and commercial components.
These could include shops with flats above, office spaces with residential units attached, or even a small block of flats with a ground floor retail unit.
Unlike traditional residential or commercial mortgages, semi-commercial mortgages recognise the unique nature of these mixed-use properties and provide tailored financial solutions to match.
Applying for a semi-commercial mortgage
You will need to provide the lender with financial details of the business you intend to run from the shop.
This would include company accounts, company bank accounts and possibly a business plan and cashflow forecast. In addition to taking the building as security, the lender may also ask for personal guarantees from the directors, to strengthen the lending proposition.
Expect to be able to borrow 75-80% loan to value.
As you would expect, due to the commercial aspect of the loan, there are fewer lenders to approach but there will also be some commercial lenders that may be able to help.
A mortgage broker who is experienced with commercial and semi-commercial borrowing will be able to advise you on which lenders would be best and how to present your case to them for the most favourable outcome.
How a mortgage broker can help
A mortgage broker can help to ensure you get the best deal from all possible lending options.
Brokers have access to over 100 lenders, and they can match you up with one which can provide a mortgage on a flat above a shop, at the most competitive rates.
Although not completely unique, there are a reduced number of lenders who will consider financing a flat above a shop. Your mortgage broker will know which lenders accept these properties and can even discuss your case before the need for a formal application.
This saves you time and money
It’s also important to remember that if you approach lenders yourself, and then get rejected, this can harm your credit file, making it more difficult next time.
CONTACT A MORTGAGE BROKER
If you are ready to take the next step then we can put you in touch with a fully qualified independent mortgage broker.
Frequently asked questions
Getting a mortgage for a flat above a shop can be more challenging as lenders often perceive these properties as higher risk. This is because the building is considered mixed-use, combining residential and commercial elements. Many lenders prefer dealing with purely residential properties to avoid the complexities and risks associated with commercial aspects.
Valuing a flat above a shop can also be more complicated than valuing a standard residential property, as the property’s value may be influenced by the performance and nature of the shop below. This makes it harder for lenders to accurately assess the property’s worth and determine the appropriate loan-to-value (LTV) ratio. Furthermore, these flats may experience increased noise levels and disturbance from the commercial activity below, which could affect the residents’ quality of life and, consequently, the property’s desirability and resale value.
Lenders also consider the future marketability of the property, as they may need to repossess and sell it in case of a default. Flats above shops can be harder to sell due to the aforementioned factors, potentially leaving the lender with a property that takes longer to sell or fetches a lower price. Additionally, flats above shops may have more complex lease and freehold arrangements, introducing additional legal and financial risks for lenders.
To secure a mortgage for a flat above a shop, it is essential to approach specialist lenders or brokers experienced with mixed-use properties. They may offer mortgages tailored to such unique property types, albeit potentially at higher interest rates or requiring larger deposits.
Certainly, you can obtain a mortgage for a flat situated above a restaurant, although it will be more challenging compared to securing a mortgage for a conventional residential property. Financial institutions and lenders view flats above restaurants as higher risk due to a variety of factors, such as potential noise pollution, strong cooking odours, and increased fire hazards related to commercial kitchens.
Despite these obstacles, there are specialist lenders and brokers in the market who cater to buyers seeking mortgages for these niche property types. They have experience in dealing with such unique circumstances and can guide you through the process, helping you identify suitable mortgage products.
To increase your chances of finding the best mortgage option for your needs, it’s essential to conduct thorough research and compare multiple lenders. In addition to comparing interest rates and fees, you should also consider the lender’s flexibility and willingness to finance properties with commercial aspects. Keep in mind that you may face higher interest rates or be required to provide a larger deposit due to the perceived increased risk.
Yes, you can get a mortgage on a flat above a bar, but it will be more time-consuming than securing a mortgage for a property in a residential area.
Some lenders perceive flats above bars as higher risk due to potential noise, disturbance, and maintenance concerns. However, specialist lenders and brokers can help you find a mortgage product suitable for such properties. It’s essential to compare multiple lenders and seek professional advice to ensure you find the best mortgage option for your unique situation.
Yes, it is possible to obtain a mortgage on a flat above a takeaway, but it can be more challenging than securing a mortgage for a standard residential property. The presence of a takeaway can pose concerns for some lenders due to potential issues such as noise, odours, and fire risks.
Here are some tips to help you secure a mortgage for a flat above a takeaway:
- Work with a specialist mortgage broker: Some lenders have more restrictive criteria for properties above commercial premises, while others are more flexible. A specialist mortgage broker with experience in mixed-use properties can help you identify lenders willing to finance such properties.
- Be prepared for a thorough property valuation: Lenders will require a property valuation to assess the property’s suitability as collateral. Factors such as noise, odours, and fire risks associated with the takeaway may affect the valuation and, in turn, the mortgage amount you are eligible for.
- Ensure proper fire safety measures: Make sure the property has appropriate fire safety measures in place, such as fire-resistant doors, alarms, and fire escapes. This can help alleviate some of the lender’s concerns regarding fire risks.
- Maintain a strong credit score and financial standing: Having a good credit score, stable income, and a sufficient deposit can increase your likelihood of mortgage approval.
Yes, you can generally obtain a mortgage on a flat above a bakery. However, securing a mortgage for a property above a commercial premises like a bakery is more difficult than obtaining one for a standard flat. This is due to the risks associated with mixed-use properties and the potential impact on the residential living experience.
Some factors that may affect your ability to secure a mortgage on a flat above a bakery include:
- Lender restrictions: Some lenders have restrictions or specific lending criteria for properties above commercial premises. It’s important to research and approach lenders who are more open to lending on such properties.
- Valuation: Lenders will require a valuation of the property to assess its suitability as collateral. The presence of the bakery may affect the property’s valuation, which could, in turn, impact the mortgage amount you are eligible for.
- Odour and noise: A bakery might generate noise and odours that could affect the living experience in the flat above. Lenders may take these factors into account when assessing the mortgage application.
Living above a shop can come with several disadvantages, which may vary depending on the type of shop, the location, and personal preferences. Some of the common drawbacks include:
- Noise: Shops, especially those with high foot traffic or loud music, can generate a significant amount of noise during their operating hours. This could be disruptive to those living above, particularly if they have different schedules or are sensitive to noise.
- Privacy: Living above a shop often means that your living space is situated near a public area, which could result in reduced privacy. Passersby and customers may be able to see into your windows, and it may be more challenging to maintain a private outdoor space.
- Odours: Depending on the type of shop, unpleasant smells may seep into your living area. For example, living above a takeaway food shop or restaurant could result in persistent cooking smells.
- Pest issues: Some shops, particularly those that deal with food, may attract pests like rodents and insects. This could potentially lead to pest problems in your living space as well.
- Parking: Shops often require parking spaces for their customers, which could limit the availability of parking for residents. You may find it challenging to secure a parking spot close to your home, especially during the shop’s peak hours.
- Limited outdoor space: Living above a shop might mean that you have limited access to outdoor spaces like gardens or balconies. This could be a drawback for those who value spending time outdoors or need space for pets.
- Security concerns: Shops can sometimes be targets for burglary or vandalism. Living above one could put your property at a higher risk of break-ins or other security issues.
- Resale value and marketability: Some buyers may be put off by the idea of living above a shop, which could affect the resale value and marketability of your property.
When considering the purchase of a mixed-use property, such as a shop with a flat above, there are several borrowing options available. Each option comes with its own set of terms, conditions, and suitability for your specific needs. Here are some of the most common borrowing options:
- Semi-commercial mortgage: A semi-commercial mortgage, also known as a mixed-use mortgage, is specifically designed for properties with both commercial and residential components. This type of mortgage takes into account the unique nature of mixed-use properties and offers tailored financing solutions.
- Commercial mortgage: If the primary purpose of the property is commercial, you might consider applying for a commercial mortgage. These mortgages are typically provided by banks and specialist lenders, and the terms and interest rates can vary based on the lender and your circumstances.
- Bridging loan: If you need short-term financing to purchase the property while arranging a more long-term borrowing solution, a bridging loan could be an option. These loans are typically offered for periods of a few months up to a couple of years and can be useful if you require additional time to secure a mortgage or sell another property.
- Business loans: If you’re planning to operate a business from the commercial portion of the property, you may be able to secure a business loan to help finance the purchase. The terms and eligibility criteria for these loans will vary based on your business and financial circumstances.
- Owner financing: In some cases, the property owner might be willing to offer financing directly to the buyer. This arrangement can be more flexible and negotiable than traditional mortgages but may not be a common option.
A semi-commercial mortgage is used to buy the freehold of a building that has both a commercial element and a residential dwelling under one title. These are also called a mixed-use mortgage.
So a retail shop that is on the market with a self-contained flat above it could be bought with a semi-commercial mortgage. The commercial aspect means that the lender will need to know the financial side of the business that is buying the building and also the one occupying the commercial shop space.
Types of commercial property
In the UK, the Town and Country Planning (Use Classes) Order categorises different types of commercial premises into various use classes. These use classes provide a standardised way of identifying the primary function of a building or land. It’s important to note that these classifications were updated in 2020, with the introduction of the new Class E.
Here’s an overview of the main use classes in England:
- Class B:
- B2: General industrial (manufacturing, assembly, and industrial processes)
- B8: Storage and distribution (warehouses and distribution centres)
- Class C:
- C1: Hotels, guest houses, and other temporary accommodation
- C2: Residential institutions (care homes, hospitals, boarding schools)
- C2A: Secure residential institutions (prisons, young offender institutions, secure hospitals)
- C3: Dwelling houses (residential use)
- C4: Houses in multiple occupation (HMO)
- Class E: Commercial, business, and service:
- Retail shops
- Financial and professional services
- Cafes and restaurants
- Offices and research facilities
- Medical facilities (clinics, health centres, and dental practices)
- Indoor sport and recreation facilities (gyms, yoga studios)
- Nurseries and day centres
- Class F: Local community:
- F1: Learning and non-residential institutions (schools, libraries, museums, public halls)
- F2: Local community facilities (community halls, swimming pools, sports facilities not for commercial use)
- Sui Generis: This term means “in a class of its own” and is used for properties that don’t fit neatly into any of the above classes:
- Theatres
- Petrol stations
- Scrap yards
- Nightclubs
- Casinos
- Hostels
- Hot food takeaway
- Public house, wine bar or drinking establishment
It’s essential to be aware of the use class for a particular property, as it can have implications for planning permission and permitted development rights when seeking to change the use of a building or land.
How does a class affect what the business can do?
The use class of a property determines its primary permitted use, which has implications for the types of business activities that can be conducted within the property. This classification system helps maintain a structured approach to land use planning and ensures that certain types of businesses or activities are appropriately located within an area.
A property’s use class can affect a business in the following ways:
Planning permission: If a business wants to operate in a property with a use class that doesn’t match its intended activities, it may need to apply for planning permission to change the property’s use class. Local planning authorities evaluate such applications to determine if the proposed change aligns with local and national planning policies, as well as its potential impact on the surrounding area.
Permitted development rights: Some changes of use between specific use classes are allowed without the need for planning permission, known as “permitted development rights.” However, these rights vary depending on the property’s current use class and the proposed new use. Understanding the use classes involved can help businesses identify if a change of use falls within their permitted development rights.
Lease agreements: Landlords often include clauses in lease agreements that restrict the types of business activities that can be conducted within a property, based on its use class. This can limit a business’s ability to expand or change the nature of its operations without seeking permission from the landlord or applying for planning permission.
Impact on surrounding area: A property’s use class can also affect neighbouring businesses and the overall character of an area. For example, a concentration of retail or leisure properties in a specific area can create a vibrant commercial district, while a mix of residential and commercial properties can encourage a more diverse, multi-functional neighbourhood.
Market demand and property value: The use class of a property can influence its market demand and value. For instance, certain types of properties (e.g., high-quality office spaces, well-located retail units) may be in higher demand and command higher rents or sale prices. Conversely, properties with a use class that has limited demand or is subject to more stringent planning regulations might be less valuable in the market.
The new Class E
The introduction of the new Class E in the Town and Country Planning (Use Classes) Order 2020 has significantly impacted change of use between different property classes in the UK. By consolidating various uses previously covered by Classes A1, A2, A3, B1, and some D1 and D2 uses, Class E has provided greater flexibility for property owners and businesses.
Here are some ways in which the new changes affect change of use:
- Increased flexibility: Under the new Class E, property owners and businesses can change the use of their property within the same class without the need for planning permission. For example, a retail shop (previously A1) can be converted into an office space (previously B1) without requiring planning permission, as both uses now fall under Class E.
- Simplification of the planning process: By combining multiple use classes into a single category, the new Class E simplifies the planning process for change of use applications. This can potentially reduce the time and resources required to navigate planning permission and contribute to a more streamlined planning system.
- Encouragement of mixed-use developments: The consolidation of various commercial uses within Class E can encourage the development of mixed-use properties, where different types of businesses can coexist more easily. This can foster a more diverse and vibrant commercial environment, with greater adaptability to evolving market demands.
- Potential impact on local character: While the new Class E offers increased flexibility, some critics argue that it might result in a loss of local character and identity, as the distinction between different types of commercial properties becomes less clear. This could also potentially lead to an overconcentration of certain types of businesses in specific areas, which might have negative effects on local communities.
- Changes to permitted development rights: Alongside the introduction of Class E, changes to permitted development rights have also been made. Some changes of use between specific use classes are allowed without the need for planning permission. It is essential to understand these permitted development rights, as they can affect whether a change of use application requires planning permission or not.
