How to get a mortgage on a mixed-use property

Buildings consisting of shops and offices with flats above are typical examples of mixed-use properties. Both the commercial and the residential element can be let. But because there is a commercial element, these properties can’t be financed with a buy to let mortgage, as Asad Khan, expert commercial mortgage broker explains.

Mixed-use or semi-commercial properties, as they are also called, are becoming an increasingly popular choice of investment because they can generate strong yields and bring an element of diversification to a portfolio. For buy to let landlords they are a bridge to investing in more commercial property.

Stamp Duty Land Tax can be less costly too as mixed-use properties are classed as non-residential which means that different rates apply. Perhaps, crucially, the 3% surcharge applied to purchases of additional residential property (i.e. buy to lets and second homes) does not apply at all as the examples below show.

Property Price Residential SDLT

Residential SDLT
inc 3% surcharge

Non-residential SDLT
£200,000 £1,500 £7,500 £1,000
£300,000 £5,000 £14,000 £4,500
£500,000 £15,000 £30,000 £15,500
£600,000 £20,000 £38,000 £19,500

 

Despite the residential element, mixed-use properties can’t be financed with a buy to let mortgage; a commercial one must be used instead.

Getting a commercial mortgage can be fairly straightforward if you have experience of investing in property – either residential or commercial… or both! Some lenders will also consider individuals who have experience of managing property even if they don’t own one themselves. The trick to finding the right lender, is to use a broker with good contacts and a deep understanding of the various lenders’ criteria. Obviously, that’s where we come in! 

If you are a broker reading this article and you do not have commercial mortgage sector experience, you can use our Deal Placement Service which means we'll work for you to get the right finance for your client. (You're client remains, your client!). 

But whilst brokering is my day job, I am also a property investor and I own a mixed-use property – a shop with a flat above. Let’s use it as an example of what I could expect to achieve if I were looking for finance.

The Property
Freehold title building worth c£650,000 consisting of

  • Ground floor and basement: Shop with A1 general retail permitted use. Let on a 10-year lease with 5 years remaining. The tenant pays £18,000 pa.
  • First and second floor: 3-bed flat, let on a single AST generating £17,000 in rent each year (£1,417 pcm)
  • Gross annual yield: 5.4% (Total annual rent divided by property value).

The Borrower
An experienced landlord with another source of income (my day job).

The Finance
I could expect to achieve:

  • Rates from 2.5% above Bank Rate
  • Up to 75% loan to value (subject to market rent)
  • Minimum loan £75,000, maximum loan £487,500
  • Terms from 2-30 years
  • Capital and interest repayment, or interest-only, or part-and-part
  • Lender arrangement fee from 0.75%-2% of the loan amount

How to apply
Commercial investment applications are not underwritten as a ‘tick box’ exercise and cases are considered on their own individual merits. This means that the requirements are not like a typical mortgage

Of course, you will need to have all your basic paperwork in order. That means proof of income, identity and address.

The first step in the process would be to get you an Agreement in Principle (AIP). This is where we submit some basic information about you and the property to the lender so that they can make an initial decision.

Once an AIP is issued and accepted, the lender will request additional information and documentation based on your specific circumstances.

Every lender has a slightly separate process, so for both the AIP and the additional information be prepared to provide:

  • 6 months banks statements (personal and/or business)
  • Statement of assets & liabilities
  • The source of your deposit
  • Details of the commercial lease/s
  • Details of the rent from the residential unit & AST

While these are being collated, the valuation can be instructed. It takes around two weeks for the lender to receive the valuation report because the surveyor visits the property and provides an opinion on:

  • Market value subject to the occupational leases
  • Market value assuming vacant possession
  • Market rent for both the commercial and residential elements

Do note, that when considering the occupational leases, the market value is derived from lease structures and rental income, so it is important to get the full tenancy details before the valuation fees are paid.

When the lender has the valuation report, the application form and all the supporting information, they can then get down to underwriting. At this stage, we’ll be in touch with you and the lender to negotiate terms and iron out any issues. Once everything is satisfactory, the lender will issue a formal mortgage offer.

If you decide that the offer is acceptable, then it will get processed. Our case managers take on the role of liaising with all parties to ensure that completion happens as quickly and smoothly as possible.

Next steps
I hope this provides you with a good overview. If you’ve got any questions, feel free to get in touch. I’m more than happy to chat through the whole process in general or specifically if you have a mixed-use property in need of finance (purchase or remortgage including raising capital).

My direct line is 01732 471652 or you can talk to any of the experts on the commercial desk, just call 0345 345 6788. Remember, if you're a broker, we can help too! Just call the Broker Desk on 0345 148 9238.

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NB: ANY PROPERTY USED AS SECURITY, WHICH MAY INCLUDE YOUR HOME, MAY BE REPOSSESSED IF YOU DO NOT KEEP UP REPAYMENTS ON YOUR MORTGAGE

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