Mixed-Use Property Mortgages: Your Guide to Semi-Commercial Investments
Mixed-use developments have become a popular investment option, combining residential and commercial spaces to maximise the potential for rental income.
These properties can range from high-street shops with flats above to more complex combinations, such as office buildings with attached living spaces.
However, obtaining a commercial mortgage for such developments comes with unique challenges.
At Kerr & Watson, we advise on mortgages for mixed-use properties, offering expert guidance to our clients.
What Are Mixed-Use Developments?
Mixed-use developments are properties that feature both residential and commercial spaces under one title.
They are particularly common in urban areas such as London and other UK cities, where space efficiency is key.
Examples include:
- Retail Units with Flats Above: Popular in city centres, these developments attract both business owners and residential tenants.
- Pubs with Accommodation: Offering living quarters for owners or staff, these properties are common in both urban and rural settings.
- Guest Houses with Living Space: Ideal for owner-operators who live on-site while running their business.
Investing in mixed-use properties can yield substantial returns, but financing them through a mortgage involves several specific considerations.
Find out Your Options
Why Invest in Mixed-Use Developments?
Mixed-use developments offer a variety of benefits for investors and landlords:
Multiple Income Streams
Having both residential and commercial tenants can help stabilise your income. If one unit becomes vacant, the other can continue generating revenue, reducing the impact of void periods.
High Rental Potential
Due to their convenience and desirable locations, mixed-use properties often command high rents compared to purely residential or commercial spaces. Businesses benefit from high footfall, while residents enjoy easy access to amenities.
Potentially Lower Risk Profile
Diversifying your income sources can make mixed-use properties a less risky investment. With tenants from different sectors, you may be better protected against market fluctuations that may impact one type of tenancy.
Attractive Locations
Mixed-use developments are usually located in bustling areas, making them attractive to both commercial and residential tenants. Easy access to transport, amenities, and business opportunities can simplify the tenant-finding process.
How Do Commercial Mortgages for Mixed-Use Developments Work?
A commercial mortgage for a mixed-use development, often called a semi-commercial mortgage, is designed for properties that combine residential and commercial elements. These mortgages are different from standard residential loans in several ways.
Loan-to-Value (LTV) Ratios
Most lenders offer up to 75% LTV for mixed-use mortgages, meaning in this case you’ll need a deposit of at least 25% of the property’s value. However, higher deposits may be required for riskier properties, such as pubs or nightclubs. Deposit requirements change so best to speak with a qualified mortgage adviser.
Interest Rates
Interest rates for mixed-use mortgages are generally higher than those for standard residential loans. The rate you receive will depend on several factors, including the loan amount, the LTV ratio, and the risk profile of the property. Talk with a mortgage adviser to find out how much you would pay.
Repayment Options
You can choose between:
- Interest-Only Mortgages: You’ll only pay interest throughout the loan term, with the full loan amount due at the end. This is popular for investment properties when the investor seeks maximum cash flow.
- Capital Repayment Mortgages: You’ll gradually repay both the interest and the loan amount, eventually owning the property outright. This gives you less cash flow due to the higher payments, however you are building equity quicker.
Factors Lenders Consider
When evaluating your application, lenders will review several aspects of both the property and your financial situation:
Property Type and Location
Lenders are interested in the balance between residential and commercial spaces. Some prefer properties with a heavier residential focus, while others may favour a stronger commercial component. The property’s location can also play a significant role; areas with high demand for both residential and business spaces are more appealing.
Credit History
A strong credit history can improve your chances of securing favourable loan terms. Lenders assess your financial responsibility based on your credit score and past financial behaviour. Not all lenders have this requirement and your adviser would be able to guide you here.
Rental Income Potential
Lenders will evaluate the projected income from both the residential and commercial units. A well-documented history of high occupancy rates and stable rental income can strengthen your application. The lender will send out a surveyor to verify rental income potential.
Deposit Amount
A minimum deposit of 25% is often required. However, offering a larger deposit can lead to better interest rates and more favourable terms.
Business Experience
If you plan to run a business from the commercial unit, your experience in that field will be considered. Demonstrating a successful track record can boost your application with some lenders.
Costs Associated with Mixed-Use Mortgages
Investing in a mixed-use property comes with several costs, beyond just the interest rate:
Valuation Fees
Lenders require a property valuation to determine its market value. This cost typically ranges from £500 to £2,500, depending on the property size and complexity. Your mortgage adviser would be able to give you a clearer idea of costs depending on the property and lenders that may consider the application.
Broker Fees
Using a mortgage broker like Kerr & Watson can save you time and money. We charge a fee for our services, but our expertise can be invaluable in securing the best deal.
Legal Fees
You’ll need to cover the cost of solicitors, both for your own representation and sometimes for the lender’s solicitor as well.
Insurance Costs
Most lenders will require you to have comprehensive insurance for the property, covering both the residential and commercial elements.
Early Repayment Charges
If you decide to pay off your mortgage early, be aware that some lenders impose early repayment fees. These are usually a percentage of the remaining loan amount.
Conclusion
Commercial mortgages for mixed-use developments can be a fantastic investment opportunity for the right investors, but they come with their own set of challenges.
From understanding deposit requirements to the application process, expert advice can make all the difference.
At Kerr & Watson, we pride ourselves on our industry knowledge and ability to connect you with the best lenders for your specific needs.
Our personalised approach ensures that you receive the support and guidance necessary to make informed decisions.
Contact Kerr & Watson today for tailored advice.
