What is a mixed-use mortgage?

Mixed-use properties have both places to live and places to do business in on one title. With generally higher income potential than a purely residential rental, these properties can represent a good investment for landlords.

You can use a semi-commercial mortgage to buy a mixed-use property. This is a specific type of mortgage that considers the unique features associated with multi-use properties.

In this guide, we look at mixed-use properties and how you can buy one with a mixed-use property mortgage.

Understanding mixed-use properties

Mixed-use properties are buildings or land areas that have both places to live and places to work or shop. They are very common in cities where there is not a lot of space, as you can add floors to create this variety of property use without increasing the property footprint, but you can also find them in suburban areas.

Here are some common combinations of mixed-use buildings:

Homes and businesses

These multi-use properties consist of residential spaces and commercial units. This type of property is common in city centres. Most typically, you will find a high-street shop or restaurant on the ground floor, with flats above.

Shops and offices

Some mixed-use buildings have shops and offices. This setup lets shops reach customers and have an office space nearby or above the retail space.

Industrial and homes

Buildings with factories and homes are not as common but they do exist. These buildings usually have homes above small factories or workshops, usually where the commercial activity does not involve loud noises.

Benefits of mixed-use properties

Mixed-use buildings offer lots of benefits for landlords:

Two or more streams of rental income

If you own a mixed-use building, you can make money from different sources. This can help you have a steady income that can assist in financial stability.

Lower impact from voids

Mixed-use buildings usually have more than one tenant. That means if one place becomes empty, a “void period”, you still have others making money.

Better tenants

When you have more than one way to make money, you can take your time finding new tenants. This is because you may be under less pressure financially to back-fill exiting tenants. Taking more time to find an ideal tenant, rather than just any tenant, can lead to better tenant choices.

Typically in attractive locations

Since mixed-use properties are generally in cities, they can be highly desirable. City centres offer good logistics, internet connectivity, recruitment opportunities and footfall for businesses.

Similarly, they offer many leisure facilities, transport links, and job opportunities for residential tenants.

Because of this, finding residential and commercial tenants may be easier.

You can charge more rent

Mixed-use properties can lead to higher rental income for landlords. As described above, their convenience and accessibility make them desirable living and working environments.

How does a mixed-use mortgage work?

You can use a semi-commercial mortgage to buy a semi-commercial property. You can borrow up to 75% loan-to-value (LTV) with a mixed-use property loan.

If you are struggling to raise a deposit in cash, you may be able to borrow against other property you own with available equity to spare.

A semi-commercial mortgage is different from a commercial mortgage. A commercial mortgage is a loan for buildings that are only used for business activities. This can include office buildings, warehouses, restaurants, and more.

Semi-commercial mortgages work in a similar way to commercial mortgages. The difference is that they carry less risk than a purely commercial property, which is typically set up for a specific use. As a result of this, semi-commercial mortgage rates tend to be lower than those for just business use.

Costs of a mixed-use mortgage

Here are the costs you can expect with this mortgage:

Mortgage interest

Mortgage interest will depend on the interest rate you can secure, which in turn are influenced by the amount you want to borrow versus the value of the property.

Semi-commercial loan interest rates are higher than on a domestic home, due to the increased risk for lenders. Your interest rate will be higher if you have a higher loan-to-value.

In terms of how you pay back the loan, you can either make monthly payments that only cover the interest, or you can cover interest as well as part of the loan total.

Paying back part of the loan as well is called making ‘capital repayments’, which gradually increases your ownership of the property. At the end of the mortgage term, you would own the property outright.

If you only pay interest, you are just paying the lender for loaning you the money, you are not paying back the money they have lent you. At the end of the mortgage term you would not own the property.

Fees

Here are some common semi-commercial mortgage fees:

• Broker fees: If you work with a mortgage broker, they may charge a fee for their help in finding you a mortgage.
• Lender fees: These cover the cost of processing your mortgage application.
• Valuation fees: This is the cost to determine the property's market value.
• Legal fees: These fees cover the legal costs of getting a mortgage, typically this involves a solicitor to represent you and one to represent the lender (which can be the same or different firms), but as the borrower you pay for both.
• Insurance: You will be required to have insurance on the building you are borrowing against by the lender.
• Early repayment charges: If you decide to pay off a mortgage early, lenders may charge you a percentage of the remaining loan, to make up for the lost interest they would otherwise receive.
• Exit fees: These fees may apply when you finish paying off the mortgage, and they cover the admin work that goes into closing a mortgage.

Deposit

Usually, you need to put down a minimum of 25% of the property's value as a deposit when you get a mixed-use mortgage. The deposit, as a percentage of the property value, can change depending on the lender's rules.

Factors that affect getting a mixed-use mortgage

Here are some things that can affect whether you get a mortgage:

Building type and location

Different lenders may like different types of mixed-use buildings. For example, some might prefer a balance of homes and businesses, others may prefer a heavier residential element. The size of the building, the number of units, and the layout can also affect whether a lender approves your loan.

Lenders also consider the property's location when evaluating the potential rental income. They prefer locations with high business activity and demand for residential units.

Credit history

Your credit history is an important factor in getting a mortgage. A good credit score can improve your chances of getting a mortgage with better loan terms. This is because lenders view borrowers with good credit scores as less risky.

Income and expenses from the property

Lenders will look at the rental income to see how much the property can make. They check the number of units and how much rent you can charge based on what others charge for a similar property.

If you can demonstrate you can earn enough rent to cover your mortgage payment and more, (so you have a financial ‘buffer’ in case a tenant misses their rent, or you have a void period) then a lender is more likely to offer you a mortgage.

Application process

The exact application process will depend on the lender. A mortgage broker can help you with the lender’s specific process.

We highlight the general step-by-step application process for a semi-commercial loan:

Research lenders

It is important to research lenders that offer semi-commercial mortgages. Compare their terms and interest rates to find the most suitable option. Look at factors such as loan-to-value ratio and consider deposit requirements for mixed-use mortgages (You can figure out the deposit requirement by subtracting the loan-to-value ratio from 100, this is your deposit as a percentage of the property value).

It is also useful to consider whether the product fee is within your budget, if there is any.

Fill out the application

Once you have found a lender, you can fill out the application. This is a formal request for a loan. If you prefer, you can always contact a mortgage broker that can do all the work involved in finding a mortgage, including making an application for you, they may charge fees for their services.

Give them your documents

Give the lender all the required documents to support your application. This can include financial statements, proof of rental income, and details about the building. This helps the lender move the process forward.

Property valuation

The lender will need to know the current market value of the building. A surveyor will look at the building's condition, size, and how much money it can make. This helps the lender decide how much to loan and what the terms should be.

The lender will typically charge you for this valuation.

Underwriting and approval

The lender will look at your application, documents, and property valuation. They will check your credit and the building's value and income potential. This helps the lender decide whether to approve your loan.

Loan offer and terms

If the lender approves your application, they will give you a formal loan offer. This will include the terms, interest rate, and payment plan. Make sure to review the offer to see if it fits your financial situation.

Accept the loan and complete

If you are happy with the terms, you can accept the loan offer and go through the completion process. During this time, you will sign legal documents that finalise the loan. After completing the paperwork, the lender will provide you with the loan funds.

Getting a mixed-use property mortgage takes time, which can depend on how complex your application is and if there are any delays. Stay in touch with the lender to ensure a timely application process.

Again, a broker can save you time, money and a lot of stress by doing all the work to get a mortgage for you.

Tips for getting a mixed-use mortgage

Here are some tips to increase your chances of getting approved:

• Prepare your finances: Make sure your financial documents are up to date. This can help move the process along efficiently.
• Work with a mortgage advisor: Get guidance from a mortgage advisor who specialises in mixed-use mortgages. They can connect you with specialised lenders who understand your needs.
• Improve your credit score: A good credit score can help you get approved and get better loan terms. Pay your bills on time, keep your credit card balances low, and manage your debts.
• Be ready for a larger deposit: Mixed-use property mortgages need a larger deposit compared to residential mortgages. Make sure to save enough money for this (25%-40% of the property value).
• Maintain clear communication: Keep in contact with the lender and respond to any requests for information or documents quickly. Clear and timely communication can help streamline the application process.

Secure a mixed-use mortgage with Commercial Trust

Commercial Trust is a specialist broker of mixed-use mortgages.

Getting a mixed-use mortgage is easy with our help. We work hard to understand your needs and find the best mortgage for you. We will handle your mortgage application and keep you informed every step of the way.

Contact an expert mortgage advisor to learn more about mixed-use property mortgages.

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