Mixed-use mortgages are specifically tailored for properties that serve both residential and commercial purposes – think of a building with a shop, restaurant, or office on the ground floor and flats above it.
These properties are what we refer to as mixed-use or semi-commercial properties.
While many are familiar with the concept of buying residential properties for renting out, known as buy-to-let investments, mixed-use properties offer a unique blend of both the residential and commercial sectors. They provide an attractive bridge into the world of commercial property investment, often yielding higher returns than standard residential properties.
However, they also come with their own set of challenges and complexities, particularly when it comes to financing.
In this guide, we will cover what mixed-use mortgages are, how they work, and why they might be a smart choice for property investors. So, whether you’re a first-time investor or looking to expand your portfolio, join us as we explore the ins and outs of mixed-use mortgages.
Understanding Mixed-Use Properties
A mixed-use property is, simply put, a property that combines both residential and commercial elements.
This fusion creates a versatile space that caters to various needs. Common examples of mixed-use properties include:
- Flats Above Shops: Where you have residential units situated above retail or commercial spaces like shops or restaurants.
- Guest Houses with Accommodation: These are properties where part of the building is used for commercial hospitality, and another part serves as private living quarters.
- Pubs with Self-Contained Flats: Similar to the above, these are properties where a commercial pub operates on one floor, with separate living accommodations above.
Classifying a property as mixed-use depends on the balance between its residential and commercial components. Key points include:
Predominantly Residential with Some Commercial Use: Even if a small part of the property (10% or less) is used for commercial purposes, it’s considered mixed-use.
Value-Based Classification: If the residential part of the property contributes less than 40% to its overall value, many lenders view it as a commercial property.
What are mixed-use mortgages?
All mortgage lenders have criteria concerning the amount of risk they wish to take and the types and styles of property they accept.
Mixed-use mortgages are designed specifically for purchasing properties that serve both residential and commercial purposes under one property title.
These mortgages take into account the unique blend of uses in the property, differentiating them from standard residential or commercial mortgages.
Not all lenders will be happy offering this type of mortgage.
Comparison with Other Mortgages
Residential Mortgages: Used for properties solely used for living purposes. They do not accommodate the commercial aspect of mixed-use properties. These could include buy to let and holiday let.
Commercial Mortgages: Aimed at properties used exclusively for business and commercial purposes. They are not suited for properties with a residential component.
Mixed-Use Mortgages: Bridge the gap between the above two, catering to properties that combine living spaces with commercial areas.
Key Features of Mixed-Use Mortgages
Loan-to-Value Ratios: You can generally borrow up to 75% of the property’s value with a mixed-use mortgage.
Risk Assessment: Lenders perceive these mortgages as less risky compared to purely commercial mortgages, often resulting in more favourable terms.
Focus on Commercial Viability: Despite combining residential and commercial aspects, the commercial viability of the property often plays a significant role in the mortgage approval process.
Not on the High Street!
The high street lenders can’t help every mortgage customer and they prefer the simple, low-risk ones.
If your situation is a bit different or needs a more personalised solution then our brokers can help.
Expert advice, for all situations.
Bridging Loans
The most flexible of secured loans and often misunderstood. Bridge loans can be used in so many different ways and can be arranged super fast.
Large Loans
High net worth mortgage brokers understand complex large loans and unique situations and can source bespoke deals from the right lenders.
Let to Buy
Let to buy combines a buy to let remortgage with a residential mortgage. Allowing you to move house while keeping your current home.
The Appeal of Mixed-Use Properties
Mixed-use properties often present the opportunity for higher rental yields compared to standard residential properties.
This is due to the dual income stream from both residential and commercial tenants, which can boost the overall profitability of the investment.
Having a mix of commercial and residential tenants in one property diversifies the risk. If one sector faces challenges, the other might remain stable, providing a safety net for the investor.
This blend of tenant types can lead to a more stable income flow.
Eligibility
When it comes to mixed-use mortgages, lenders have a specific set of criteria they use to assess applications. These include:
Affordability: The primary focus is on the viability of the business plan and projected revenue from the property. This includes analysing potential rental income from both commercial and residential spaces.
Trading History: Lenders often prefer applicants with a proven track record in managing similar properties or businesses, as it indicates lower risk.
Credit History: Both the personal credit history of the applicant and the credit history of any existing businesses are scrutinised to assess risk.
The value of the property plays a crucial role in determining how much can be borrowed. Lenders typically finance up to 75% of the property’s value, known as the loan-to-value (LTV) ratio.
Properties with a strong commercial element might attract different LTV ratios compared to those with a more significant residential component.
Documentation and Business Plan
A thorough and convincing business plan is essential. It should detail the expected income, expenses, and overall strategy for managing the mixed-use property.
Required documents usually include proof of identity, bank statements, proof of income and outgoings, and details of any other property owned.
Deposits
Mixed-use mortgages often require a larger deposit compared to standard residential mortgages. This is typically in the range of 25% to 40% of the property’s value.
The exact deposit required will vary depending on the lender’s assessment of the risk associated with the property and the borrower.
You will find more useful information in our Guide To Deposits
Getting a mixed use mortgage
Applying for a mixed-use mortgage involves several key steps, designed to ensure that both the investor and the lender are making a sound financial decision.
Here’s a general overview of the process:
Initial Assessment: This involves identifying the mixed-use property you intend to invest in and understanding its potential as an investment.
Business Plan Preparation: Develop a comprehensive business plan that outlines your strategy for the property, including projected revenues from both the commercial and residential parts.
Gathering Necessary Documents: Collect all required documents such as proof of ID, bank statements, and any other relevant financial information.
Semi-commercial mortgages are often tailored to the specific property and borrower. Rates and terms can vary significantly between lenders.
It’s important to understand that these mortgages are not ‘one-size-fits-all’ and require a custom approach based on the unique aspects of the property and the borrower’s financial situation.
Specialist Commercial Broker
Given the complexity of mixed-use mortgages, seeking advice from a specialist broker is necessary.
These professionals have deep knowledge of the market and can guide you towards lenders who are likely to offer favourable terms based on your specific circumstances.
The lenders active in this market rarely deal direct with borrowers, they always prefer a commercial mortgage broker to be actively involved.
Tips for Securing a Mixed-Use Mortgage
Prepare Your Finances
Ensure all your financial records are accurate and up-to-date. This includes personal and business bank statements, proof of income, and any other relevant financial documents.
It’s important to present a stable financial picture. Make sure your current debts are well managed and that you have a clear understanding of your financial commitments.
Enhance Your Credit Score
A strong credit score will significantly improve your chances of getting a favourable mortgage deal. It’s always a good idea to get a copy of your own credit report to see what’s on it. Pay bills on time, reduce outstanding debts, and avoid making multiple credit applications in a short period.
Be Ready for a Larger Deposit
Mixed-use properties will require larger deposits than standard residential properties. This could range from 25% to 40% of the property value. Start saving early and consider various sources for your deposit, including equity from existing properties if applicable.
Work with a Specialist Broker
A mortgage adviser who specialises in commercial and mixed-use properties can provide invaluable assistance. They can help with the complexities of the application process and connect you with the right lenders. These advisers have access to a network of lenders who might not be directly accessible to the general public.
