Semi-commercial mortgages are designed for properties that are used in both residential and commercial terms – in other words, homes that are lived in by their owners, but also used as their place of work.
This type of agreement can be used to secure all kinds of properties that meet this description, including shops with flats above them, pubs or hotels with homes attached to them, or bed and breakfast hotels that are also used as residential properties. Other examples include catteries and dog boarding kennels, as the pet accommodation will need to be separate from the main living area.
We understand that some applications are more complex than others. For example, if you’ve only been trading for a short time, or if you have a confusing ownership structure, you may need to spend a little more time putting together an application that will convince your preferred lenders to take a view on your case. In addition to this, most lenders will usually want to see that at least 40% of the property is used for residential purposes, so you’ll need to make sure that you have the appropriate split in place.
Luckily, we have a specialist team of brokers on hand to introduce you to lenders who are more likely to accept your circumstances and offer competitive interest rates on semi commercial mortgage deals.
Is a semi-commercial mortgage right for me?
If the property that you’re looking to mortgage has a combination of residential and commercial floorspace, then it’s likely this type of mortgage will work for you. It’s worth bearing in mind that if your property has separate entrances for the commercial and residential parts of the building, these will be considered as two separate entities, and you will need to take separate mortgages out against them: one for the commercial environment, and one for the residential.
Lenders have very different understandings of semi-commercial and commercial properties and there can be quite wide variances between each of them. As we mentioned earlier, some work on the 60/40 square footage rule, whereas some prefer to work on a monetary value perspective.
If you’re not sure what type of mortgage you need, we are more than happy to have a chat with you to understand what would work best in your specific circumstances.
What are the typical eligibility criteria?
There are a few common eligibility criteria that lenders use to assess their applicants, including:
Your deposit amount – how much you can afford to put down on the property to begin with
Your credit rating – and whether you have any severe black marks on your credit file that would ring alarm bells
The affordability of your mortgage – as in, whether or not you can afford your monthly repayments, based on your earnings and outgoings
Your trading history – how successful the commercial aspect of your property has been in terms of generating income
The overall strength of the investment
Let’s go into these in a little more detail.
As with any property purchase, you will need to organise a deposit. For semi-commercial properties, these are usually about the same as for a commercial purchase: between 20-40%. This figure can vary depending on the property and your own circumstances, as well as whether the property is owner-occupier or a commercial investment deal.
Owner-occupied commercial mortgages are for businesses that are buying premises with the purpose of working there, with a loan to value (LTV) of around 80%. Commercial investments have a slightly lower LTV of roughly 75%.
You can offset a semi-commercial mortgage with a higher LTV by putting down additional security measures, such as existing property or other assets you hold equity in.
Your credit rating
Your interest rate will usually be dependent on your own personal circumstances, so your credit rating will have a bearing on your suitability for a mortgage. If you have poor credit, it may be more difficult to find a lender – but the key thing to remember is, it’s not impossible. The team here at CLS Money works with a range of specialist brokers who have offered loans to people from all backgrounds, and with all manner of past credit problems.
If you have good credit, your options are likely to be increased and you could have access to much better interest rates.
Any mortgage lender will want to have a good understanding of your current and projected income in order to assess the affordability of your semi-commercial mortgage. This will usually be worked out by looking at earnings before interest, depreciation, and amortisation (EBITDA).
Your lender will need to be reassured that your repayment schedule is both comfortable and doable. They may get the confirmation they need from the company’s own operating performance, or from other legal income that you may have access to.
As always, it’s important that you look into a range of different mortgage providers to make sure you are getting the best deal.
If this is a new venture for you and you are entering an industry that you have little to no experience in, this can work against you when seeking a semi-commercial mortgage. This is because some lenders want to see a proven history in the industry; it will give them more confidence that their investment will be safe.
This isn’t true all the time, and there are lenders who specialise in start-up and first-time investor. However, you may need to provide a sturdy business plan and projections for expected revenue over the length of your mortgage term.
The strength and viability of the investment
Most lenders will only provide you with a mortgage if they are comfortable that the investment is sound, with many expecting around 190% forecast rental coverage for a business property, or 130% for a Buy to Let. It should be noted that these are averages and certainly not the expectations of all lenders.
What are the advantages of a securing a semi-commercial mortgage?
Affordable interest rates
Mortgages on semi-commercial properties will usually have lower interest rates than other means of unsecured borrowing. Being able to secure fixed monthly repayments makes it easier to work these into your monthly forecasts and plan the finances of your business in a more concise way.
You can make quite a hefty amount of capital when you purchase a commercial property. This can be a great way of investing your money as, in most circumstances, property prices tend to rise over time, giving you a potential nest egg for the future.
If you own a commercial property, you can always choose to rent it out now or in the future if you wish, which will generate a continual income. You will need to take out a specific Buy to Let mortgage if you choose to go down this route, and you will need to bear in mind any existing leases that might already be in place.
No wasting money on rent
Your monthly repayment fees will be about the same, if not less than, what you would have been paying in rental fees. You will also benefit from the equity you have in your property growing over time, giving you more protection and security for the future.
Ending a mortgage is much easier
No matter the reason for ending your mortgage, there are more options available to you if you’ve taken out a semi-commercial option. For example, you can sell the property on to another investor or choose to rent it out to cover the mortgage payments instead.
We would always recommend that you speak to a specialist accountant to understand the tax benefits and implications for your specific circumstances.
What about the disadvantages of pursuing this kind of mortgage?
Deposits are usually higher for commercial properties than residential ones, and this is no different for semi-commercial properties. When you’re running a business, it can be a tricky decision to weigh up whether a big chunk of funds would be better invested in a property, or spent on expanding your enterprises elsewhere.
As with any owned property, the general upkeep of the space will be down to you, so this can be an extra expense if any issues were to arise, such as a broken boiler. These additional (and often unexpected) costs will need to be factored into your overall affordability profile.
Potential drop in property prices
Any negative fluctuation in property prices could leave you in negative equity with your property. Although prices will usually rise again, if you find yourself in a rush to sell for any reason, this could reduce your capital and affect your future borrowing capacity.
Unsuitable or largely undesirable living space
Fewer people want to live in homes that are attached to busy and often noisy venues like pubs and hotels. If your semi-commercial investment includes a residential property, you’ll need to factor in its location and construction when marketing it to potential tenants; there may be a smaller pool of interested parties than you think.
If you choose a variable mortgage rate rather than fixed, there could be vast fluctuations in the amount you owe each month depending on how the interest rates change over time. The interest rates are based on the decisions of the Bank of England, so they are not something you will be able to negotiate with your lender if they start placing a squeeze on your finances.
How to find the right mortgage for your circumstances
There are almost endless options for purchasing a semi-commercial property, and it can be daunting navigating the mortgage market on your own when there are so many factors at play and so many decisions to make. At CLS, we always recommend working with a specialist mortgage broker who will be able to outline your options and help you find the best deal possible.
We can help to guide you through each of the different financial options in a simple and easy to understand way, giving you the reassurance that you’re making the right choice.
We can also provide access to our trusted professional partners, such as insurers and solicitors should you need them.
We are dedicated to offering you a fully rounded service, ensuring you get the best possible outcomes and a product that is best suited to your individual needs.
At CLS, we want to make the process as quick and simple for you as possible. All you need to do is let us know what you’re looking for – from there, we will get in touch to arrange your free initial consultation.
Once we’ve sourced a suitable semi-commercial mortgage, we’ll happily take on the application process, meaning you can rest safe in the knowledge that your mortgage is being dealt with by the professionals. We will provide regular updates so that you know where you are in the process and can always answer any questions you may have throughout the journey.
We also offer face-to-face mortgage advice throughout Essex and the South East of England, as well as an online mortgage advisor service via telephone and email to customers throughout the UK.