Mortgaging Mixed Use Investment Property: An Introduction

We’re seeing a definite increase in investors opting for mixed use properties – but what’s making them such a popular investment? Head of Commercial, Andy Elley, explains what they are, why they’re popular and what to expect if you’d like to mortgage one…

What is a mixed use investment property? 
Typically, a mixed use property includes a flat above either a shop, office or retail unit, all under one freehold. Less typically, these can include more diverse properties such as pubs with self-contained residencies above or bed&breakfasts where the owner has a permanent residence. Broadly speaking, it is a mix of a residential dwelling (buy to let or not) and commercial property.

Why are mixed use property investments different?
Mixed use properties are classed as commercial investments, which requires a commercial lender for the mortgage finance. These lenders will consider mortgage applications on a more individual, case-by-case basis than they would a standard buy to let property. This is because there are more factors for them to take into consideration, including the type of tenant lease in place on the commercial unit. However, although they require a specialist mortgage, we have access to plenty of lenders who offer this type of finance.

Why are mixed use property investments popular?
Amidst the recent tax changes to residential buy to let properties, because mixed use properties are classed as commercial, landlords are still able to offset their loan interest and costs against the profit and loss account, making them a very inviting investment. Furthermore, they do not incur the 3% surcharge on stamp duty, unlike fully residential buy to lets.

Mixed use property investments generally return a higher yield compared to residential buy to lets. At the moment, we’re seeing an average return of around 8.7%, whereas ‘vanilla’ buy to lets continue to sit around the 5.8% mark. In addition to this, there are other factors to think about including associated costs, for example, tenants of a commercial unit are usually responsible for their maintenance costs, unlike in a residential buy to let which falls to the landlord.

It’s worth mentioning, however, that while yields may be higher, capital growth in mixed use units is more difficult to quantify. This is because valuation methodology of the property needs to take into account more factors than a standard residential buy to let would.

Mortgaging mixed use property investments
For mixed use investments, you will need to source your mortgage finance through a commercial lender. They will use the combined rental income of the commercial unit and the buy to let residence to calculate how much you will be able to borrow. It’s worth bearing in mind that, while commercial lender rent to interest stress testing uses a very similar model to that of standard buy to let lenders, it will be relative to commercial mortgage interest rates. Therefore, the amounts you can borrow will be different to a purely residential buy to let property.

Due to the commercial element, mortgage rates are slightly higher than standard buy to let rates, though not as much as you might think. We have lenders with variable rates starting from 3.24%* over LIBOR at a 55% loan to value (LTV).

Product fees typically start from 1.50%* added to the loan and there’s a diverse range of options, so it’s worth talking to your broker about the type of product you’d like to find.

In some cases, where the buy to let residence is more than 50% of the freehold and the rental income is enough to cover the mortgage repayments, we have access to some buy to let lenders that will be able to ignore the commercial element and lend purely on the flat. The main benefit of this is you’re likely to get a slightly lower rate; we have access to some starting from 2.95% with options of free valuations and/or cashback.

In terms of income requirements, some require a minimum of £25,000 whereas others only ask for an income which will be able to cope with any void periods.

What experience do I need for a mixed use property investment?
Due to the more complex nature of mixed use property finance, lenders will normally require you to have some buy to let landlord experience before they’ll consider lending on these types of investments. The amount of buy to let experience lenders ask for varies from 6 months to 3 years.

If you’re considering a mixed use property as your next investment and want to know more about what to expect and the types of rates you’d be able to acquire, do not hesitate to get in contact with me on 01732 471644  or email  and I will be happy to discuss your options.

 

*Figures quoted correct as at 8th November 2019.

 

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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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