If you are considering purchasing a mixed-use property or converting an existing property to serve both residential and business purposes, you may be evaluating the most suitable financing options.
What is a semi-commercial mortgage?
If you are looking to secure financing for a mixed-use property, neither a standard residential mortgage nor a commercial mortgage is likely to meet your needs. In most cases, a property with both residential and commercial elements, or plans to incorporate them, will require a semi-commercial mortgage.
Properties are typically categorised as commercial, residential, or mixed-use, based on the proportion of residential and commercial floorspace. Generally, if the property has a residential and commercial split exceeding 40/60, most lenders classify it as mixed-use. For example, purchasing a house with an attached shop or retail space would usually necessitate a semi-commercial mortgage.
That said, lenders often apply their own definitions of mixed-use properties. Consulting a mortgage broker with expertise in semi-commercial finance is advisable to identify the most suitable lender and mortgage product for your specific circumstances.
When would you need one?
The primary factor in determining whether a semi-commercial mortgage is required is the percentage split between the property’s residential and commercial components. For instance, if the residential portion of a primarily commercial property is minimal, a semi-commercial mortgage may not always be necessary.
This percentage split is typically assessed based on either the value of each component or, in some cases, the square footage. Properties with separate entrances for residential and commercial areas are often appraised more favourably than those with a shared entrance.
A semi-commercial or mixed-use mortgage can be used to purchase various types of properties, including:
- Pubs with residential accommodation above
- Blocks of flats with ground-floor retail units
- Homes with attached medical or treatment rooms, such as a doctor’s surgery
- Bed and breakfast or guest house properties
- Farms
- Veterinary surgeries or kennels
Understanding the property’s specific use and layout is essential to identifying the right financing solution.
Lending criteria
As with any residential or commercial mortgage, lenders assess your eligibility for a semi-commercial mortgage based on the level of risk associated with lending to you. While specific criteria vary between lenders, key considerations typically include the following:
- Deposit Requirements: Semi-commercial mortgages generally require a deposit of at least 20%. However, depending on the perceived risk and the percentage of commercial use, this can range from 25% to 40%.
- Personal and Business Finances: If the property will be used for both residential and commercial purposes, lenders will evaluate your personal and business financial situations. This includes reviewing your trading history and credit score.
- Industry Experience: Many lenders expect applicants to demonstrate experience in owning or managing a similar type of business. A comprehensive business plan and projections of future income are usually required as part of your application.
- Property-Specific Criteria: Factors such as the property's location, overall value, and trading history of the commercial element (if purchasing an existing business, like a pub) will also influence the lender's decision.
Meeting these requirements is crucial to securing the most suitable mortgage terms for your mixed-use property.
How much could you borrow on a semi-commercial mortgage?
The loan amount for a semi-commercial mortgage is determined by the level of risk involved and the size of your deposit. Typically, lenders offer up to 80% LTV (loan-to-value), meaning you could borrow up to 80% of the property's total value.
In some cases, it may be possible to secure a loan of up to 100% of the property's value if you can provide a high-value asset as additional security, either alongside or in place of a deposit.
To assess affordability, most commercial lenders will evaluate the business’s earnings before interest, taxes, depreciation, and amortisation (EBITDA). This provides a clear indication of potential operating profits and helps lenders gauge the viability of the investment.
Semi-commercial mortgage rates
Semi-commercial mortgages typically have slightly lower interest rates than fully commercial mortgages but are generally higher than residential mortgage rates. The rate offered will largely depend on the ratio of residential to commercial space within the property.
The location of the property usually has little impact on the rates offered, as lenders focus on the overall risk associated with the loan. This means that semi-commercial mortgage rates for a property near London should, in principle, be comparable to those for a similar property in Manchester. However, rates can vary significantly between lenders due to their individual criteria and risk assessment processes.
To find the most competitive rates and suitable options for financing your mixed-use property, consult our specialist brokers for a semi-commercial mortgage comparison.
Which lenders are available?
The market for mixed-use mortgages is smaller than that for residential mortgages, with fewer lenders specialising in this area. Because of the commercial component, these loans are more commonly provided by commercial lenders rather than high street banks. However, some mainstream lenders may offer semi-commercial mortgages for simpler investment cases, particularly when the property has a straightforward residential and commercial split.
Frequently Asked Questions
No, you cannot use a standard residential mortgage for a property that includes any commercial use alongside residential use. In such cases, a semi-commercial mortgage is required to accommodate the mixed-use nature of the property.