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mixed use property investment

Mortgaging Mixed-Use Investment Property: An Introduction

We’re seeing a definite increase in investors opting for mixed-use properties – but what makes them such a popular investment? We explain 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 or semi-commercial property includes a flat or multiple flats above either a shop, office or retail unit, all under one freehold. Sometimes, these can include more diverse properties such as pubs or guest houses with self-contained owners’ accommodation above.

Why are mixed-use property investments different?
Mixed-use properties are generally classed as semi-commercial investments, which require a commercial lender to source the property finance. These lenders will consider mortgage applications on a more individual, case-by-case basis than they would a standard buy to let property. With more factors for them to consider, including the type of tenant, the lease term in place and whether the applicant owns other investment properties, it is no wonder that lenders prefer to take a view on each case. Despite these types of properties being seen as ‘specialist’, there is still a plethora of mortgage rates available on the market.

Why are mixed-use property investments popular?
As mixed-use properties are classed as commercial units, the 2016 tax changes to buy to let properties have not touched these types of investments, and landlords can still offset their loan interest and costs against their profit and loss accounts. This tax benefit makes these properties an inviting investment, especially as they do not incur the 3% surcharge on stamp duty like a buy to let property would. Please seek professional tax advice before making any investment decisions.

Mixed-use property investments also generally return a higher yield compared to residential buy to lets. At the moment, we’re seeing an average return of around 6.09%, whereas ‘vanilla’ buy to lets continue to sit around the 5.35% mark (MFB BTL Index Q1 2022). 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, and the valuation of these properties draws from several of factors. This includes location, commercial element’s square footage, and comparable evidence from recent semi-commercial property sales.

Mortgaging mixed-use property investments
For mixed-use investments, you will need to source your mortgage finance through a commercial lender, who will use the combined rental income of the commercial unit and the residential elements to calculate how much you can borrow. It’s worth bearing in mind that, while commercial lender stress testing uses a very similar model to that of standard buy to let lenders, it will be relative to commercial mortgage interest rates available at the time. Therefore, how much you can borrow will differ from the amount you could borrow for a house or flat investment purchase.

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 from 4.74% to 4.99%, fixed for five years at a 65% to 75% loan to value (LTV).*

Product fees typically start from 1.50% to 2%* 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 residential uppers take up more than 50% of the freehold, and the rental income is enough to cover the mortgage repayments, we have access to some lenders that can ignore the commercial element and lend based on the rental income generated by the flats. This can sometimes give you access to slightly lower rates.

In terms of income, the majority of lenders don’t have a minimum requirement; however, they will need to see your tax computations for three years and bank statements showing any property-related investment income.

What experience do I need for a mixed-use property investment?
Due to the more complex nature of mixed-use property finance, lenders prefer you to have some type of investment property experience before they’ll consider your application. The amount of experience they’d like to see can vary from one to two 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 contact us. Call 0345 345 6788  or submit an enquiry, and we’ll be happy to discuss your options.

 

*Rates as at June 2022

 

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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