How to Get a Mortgage for Flats Above Shops
Buying a flat above a shop or commercial property comes with unique benefits and challenges.
These flats are often in prime locations, close to amenities, and may be more affordable than other residential properties.
However, getting a mortgage for a flat above a shop can be more complex, with lenders sometimes applying stricter criteria.
If you’re considering such a property, understanding the mortgage process is prudent.
Why Are Mortgages for Flats Above Shops Considered Risky?
Lenders view flats above shops as higher risk compared to standard residential properties. The main reason is the potential impact on the property’s future value and saleability.
Here are some factors that can make lenders cautious:
Noise and Disturbances
Properties above or near commercial premises, such as takeaways, pubs, or laundrettes, can be noisier and busier than homes in purely residential areas. The constant foot traffic and operating hours of the business below can deter future buyers or tenants.
Smells and Pollution
If the commercial unit below is a restaurant or takeaway, strong smells and potential air pollution can be a concern. This could make the flat less appealing to future buyers.
Saleability Concerns
In case of repossession, lenders want to ensure the property will be easy to sell, should they have to repossess. Flats above shops often have more limited appeal, making them more difficult to resell.
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Types of Businesses That Impact Mortgage Decisions
The type of business operating below or nearby can significantly influence a lender’s decision. Here’s a quick breakdown:
Businesses That Are More Favourable
- Retail Stores: Shops that operate during standard business hours with less noise / smells, such as clothing stores or bookshops, are generally seen as lower risk.
- Professional Services: Offices for accountants, solicitors, or doctors’ practices are also more acceptable to lenders due to less disturbance.
Businesses That Are Less Favourable
- Takeaways and Restaurants: Due to noise, smells, late opening times and increased foot traffic, these are seen as higher risk.
- Pubs and Bars: Late operating hours and potential for antisocial behaviour make these properties less desirable.
- Beauty Salons and Laundrettes: The potential for noise and chemical smells can be a deterrent to some buyers / lenders.
The decision often hinges on a valuer’s assessment of the property. A mortgage lender may base their final decision on the comments and recommendations from the property valuation, even if they do not have strict criteria against the premises in general.
Deposit Requirements for Flats Above Shops
If you’re looking to purchase a flat above a shop, be prepared to potentially need a higher deposit. Here’s what you need to know:
For a typical residential property, you might only need a 5% deposit. However, for flats above commercial premises, lenders may require a higher deposit, ranging from 10% to 40% depending on the lender and the premises it’s above. Some lenders may still be willing to allow 5% down if they consider the property a standard dwelling and offer such low deposits.
The nature of the business below can impact the deposit amount. For instance, a flat above a takeaway may require a 25% to 40% deposit, while one above a retail store might only need a 5% to 20% deposit.
At Kerr & Watson, we can assess your financial situation and advise the likely deposit based on your situation and the type of property you wish to purchase.
Affordability and Income Considerations
Lenders will assess your income and financial situation to determine affordability. The good news is that the income multiple used for flats above shops is like standard residential mortgages, typically around 4 to 5 times your annual income. You can use our affordability calculators for a guide.
However, factors such as your existing financial commitments, dependents, age and credit history will still be considered so you should always speak with a mortgage adviser to determine your affordability.
Buy-to-Let Mortgages for Flats Above Shops
If you’re considering a flat above a shop as an investment property, a buy-to-let mortgage may be necessary.
- Rental Income: Lenders will calculate affordability based on the projected rental income. Typically, the rental income needs to cover 125% to 145% of the mortgage interest payments, but the stress test may be stricter on a product that is variable or fixed for less than 2 years.
- Stress Testing: Lenders stress-test the mortgage to ensure you can handle interest rate increases.
Buy-to-let mortgages for flats above shops can be more complicated, but an experienced mortgage adviser will have the expertise to make the process straightforward.
Insurance Considerations
Getting insurance for a flat above a shop can be more challenging and expensive. Lenders require you to have adequate home insurance as part of the mortgage terms. The cost of insurance may be higher if the shop below increases the risk of damage, such as fire hazards from a restaurant. It’s crucial to compare insurance options and factor in these costs when budgeting for your new property.
Conclusion
While securing a mortgage for a flat above a shop can be more complex, it’s is possible with the right lenders, if you are meeting the required criteria.
With the correct advice and lender, you can achieve your goals. We have vast experience arranging mortgages on properties above shops so we can spend time understanding your situation before speaking with the lenders on your behalf to find the best solution for you.
We are here to support you every step of the way, ensuring you get the best possible mortgage terms.
