What is a semi-commercial mortgage?

Categories: commercial mortgages | guides

A semi-commercial mortgage is a type of mortgage used to purchase property that is partially for commercial purposes.

This type of mortgage is also known as a mixed-use mortgage, as the property serves both commercial and residential purposes.

A semi-commercial mortgage is a secured loan, meaning that the property is used as collateral. The loan can be used for various purposes, such as buying, refinancing, or renovating semi-commercial property.

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Who should apply for a semi-commercial mortgage?

Semi-commercial mortgages are suitable for businesses or individuals who want to buy property that has a commercial and residential component.

This type of mortgage can be used to purchase mixed-use buildings, such as shops with flats/apartments on the upper floors, or office buildings with attached residential units.

Where a building is only going to be used for businesses to operate from, a commercial mortgage would be used, likewise, where a property was only for residential tenants to live in, a buy to let mortgage would be used.

Can I live in property bought with a semi-commercial property?

Semi-commercial mortgages are suitable for those looking to purchase property for business purposes, but also plan to live in the premises.

In this instance, the total area of the premises that you plan to live in must be no more than 40% of the total area of it (this includes land, e.g. the garden, and the part of the property that you will live in).

How do semi-commercial mortgages work?

A semi-commercial mortgage works similarly to a regular buy to let mortgage. The lender will lend you money based on the value of the property you want to purchase, and the income the property generates in rent.

The amount you can borrow will depend on the lender's criteria, your financial situation, and the value of the property.

The loan is secured against the property, which means if you don't keep up with the mortgage payments, the lender can repossess the property.

What sorts of property can you purchase with a semi-commercial mortgage?

A semi-commercial mortgage can be used to purchase a variety of properties which include a residential element, including shops, offices, warehouses, and other mixed-use buildings. Essentially, any building or plot that includes both type of property, for example:

  • A flat above a shop or office
  • A semi-detached building where a house has a restaurant attached to it
  • A pub with a living space for staff
  • Boarding kennels with owner accommodation
  • Stables and paddocks with residential accommodation on the same plot

Understanding semi-commercial mortgage interest rates and costs

The interest rates to expect

Interest rates on semi-commercial mortgages can vary depending on the lender and the borrower's financial situation.

Typically, the interest rates on semi-commercial mortgages are higher than buy to let mortgages due to the added risk involved, but lower than pure-commercial mortgages because the risk is diversified across different premises.

The interest rates may also be influenced by the Loan to Value (LTV) ratio, which is the amount of the loan compared to the value of the property. The higher the LTV, the higher the interest rate is likely to be, because the lender is taking on a greater proportion of the risk.

Associated fees

Semi-commercial mortgages often come with additional fees, such as arrangement fees, valuation fees, and legal fees.

  • Arrangement fees are charged by the lender to cover the cost of setting up the mortgage.
  • Valuation fees are charged to cover the cost of valuing the property.
  • Legal fees are charged to cover the cost of legal work involved in the mortgage process.

Loan to value

The loan to value of a semi-commercial mortgage will tell you the maximum percentage of the property value a lender is willing to loan, meaning you will have to put down the rest of the money.

The amount you have to put down (your 'deposit') is typically higher than with a residential mortgage.

As a general rule, you will be able to borrow up to 75% of the property value. The rest you will need to raise (e.g. from savings), or you may be able to use equity in another property to raise the money.

Investment versus owner-occupied semi-commercial mortgages

Semi-commercial investment mortgages

If you are buying a semi-commercial property just to let it out to third parties (rather than run your business from the commercial element or live in the residential component) then this can be described as a semi-commercial 'investment' mortgage.

This is where a property has been bought purely as an investment and to generate rental income.

They are popular with landlords who want to diversify their property portfolio. Semi-commercial investment properties can also be a useful transition into pure commercial investing.

Both typically offer higher yields than a standard buy to let rental property let to one family unit, so whilst they come with higher risks, the financial benefits can be a strong motivation to get into this area of property investment.

Owner-Occupier semi-commercial mortgages

Owner-occupier semi-commercial mortgages are used by businesses that own and occupy a property that is partly residential and partly commercial. These properties can be an attractive option for businesses that want to own their premises instead of renting.

If you are operating your business from the premises, renting out the residential element may be a good way to mitigate the risk of owning the property and relying on just your business to cover the mortgage costs, or it may be useful to have a residential element for yourself or your employees.

Credit scores and semi-commercial mortgages

Your credit score plays an influential role in whether or not securing a semi-commercial mortgage. A good credit score demonstrates to lenders that you are a responsible borrower and that you are likely to repay the loan.

Your credit score is based on factors such as your payment history, the amount of debt you have, and the length of your credit history.

When applying for a semi-commercial mortgage, some lenders will look for applicants who do not have any adverse credit, where others might actively seek out this sort of client scenario, as they specialise in this area.

If you do have any adverse credit, Commercial Trust will match you to an appropriate lender.

Some types of adverse credit may present too much risk to any lender, in which case the best option for you may be to work on improving your credit profile. Our commercial specialists can give you an idea on which issues present hurdles in the eyes of the lenders, so you know where to focus your efforts.

What’s the best way to get a semi-commercial mortgage?

A great way to get a semi-commercial mortgage is to work with a broker, like us, who specialises in property investment finance.

A broker can help you navigate the complex process of securing a semi-commercial mortgage and can connect you with lenders who are willing to lend to you, and who offer you the most competitive deal.

A broker can also help you find the best interest rates and loan terms, based on your specific needs.

When working with a broker, it is essential to be honest about your financial situation and your credit history. Providing accurate information upfront can help us find the best lender for you and can save time in the long run.

Alternatives to consider

If you are unable to secure a semi-commercial mortgage or prefer not to take out a loan, there are alternative financing options available. Here are a few options to consider:

  • Cash purchase: if you have it available, you may want to buy with cash.
  • Bridging finance: if the property you have in mind is in need of renovating to the extent that a mortgage lender won’t accept it, a bridging loan can help. The property can be renovated using bridging loan finance and, once work is completed it can be paid off with longer-term finance.
  • Buy to let mortgage: If your property is only for residential rental purposes a buy to let mortgage will be more appropriate.

FAQs

You can typically borrow a maximum of 75% of the value of the property.

If you do not have cash available to use as a deposit, it may be possible to borrow against other property to raise funds for this. This could be other rental property or your home. This must be done with care, because if you cannot keep up with payments on a mortgage or other borrowing on property, the property is at risk of repossession.

A semi-commercial property is partly for business use and partly for residential use. A typical example is a flat above a shop.

The valuation of semi-commercial property can be complex and requires consideration of several factors. Semi-commercial properties typically have a mixture of residential and commercial uses, such as a building with both retail space on the ground floor and apartments above.

Valuation of semi-commercial property usually takes into account the rental income generated from both the commercial and residential parts of the property. The rental value of the commercial space is usually calculated based on the market rent for similar commercial properties in the area. The rental value of the residential units is calculated based on the market rent for similar residential properties in the area.

The property's value can also be affected by the location, condition, age, and size of the property, as well as any potential for development or refurbishment. Other factors that can influence the valuation of semi-commercial property include the lease terms and tenant mix.

Ultimately, the valuation of semi-commercial property is determined by the market and the perceived value of the property to potential buyers or investors. It is important to engage the services of a qualified and experienced valuer to ensure that the property is accurately valued.