Semi-commercial mortgages

Why these cases get two declines

Mixed use property is ordinary in every British high street and awkward in almost every lending policy. A buy to let lender sees a commercial unit on the title and declines. A commercial lender sees flats and decides the case belongs somewhere else. The building has not changed between those two conversations; only the policy it was measured against has.

The cases we see most often are people who have found a good building at a sensible price, been told no by their own bank and by a broker who only places residential business, and concluded that the property is unfundable. Usually it is not. It has simply been put in front of the wrong lenders.

What is needed is a lender that treats mixed use as a category in its own right rather than as an exception to something else, and a case presented so that the underwriter can see the whole building at once.

How lenders weigh the split

The first thing an underwriter establishes is how the building divides between its commercial and residential parts, usually by floor area and by income. That split then decides which book the case is written in.

Some lenders treat the whole title as commercial regardless of how many flats there are. Others weight the case by the residential element, so a building that is mostly flats is treated close to a residential investment. A third group takes the higher-risk element and applies commercial terms to everything. The difference in the borrowing available between those approaches can be substantial for the same building.

Which way the case is presented is therefore a decision rather than an accident. Getting it right is the part of this work that changes outcomes, and it has to happen before an application exists, because a decline recorded against a building follows it around.

Two income streams, assessed separately

A mixed use building produces commercial rent and residential rent, and lenders do not treat them as one figure. Each is tested on its own terms and then combined.

• The residential rent is tested much as a buy to let would be, on the rent the valuer supports rather than the rent you hope for
• The commercial rent is tested against the lease and the tenant, so its quality matters as much as its amount
• A vacant element on either side is usually assessed at nil income until it is let, which reduces the borrowing available today
• Where the flats are let on separate tenancies, the lender will want each one documented
• Where the whole building is let to a single tenant who sublets, that is a different and narrower case

One practical consequence: a building bought with empty flats can be refinanced for more once they are let and the income is evidenced. That sequencing is often worth planning deliberately rather than discovering later.

The commercial tenant's trade

The trade going on at ground floor level does more to determine lender appetite than anything about the flats. Lenders are thinking about two things: the risk the business itself brings to the building, and how easily the unit would re-let if that business left.

The trades that make lenders cautious are reasonably consistent. Hot food and restaurants, because of cooking risk, extraction, odour and the effect on the flats above. Licensed premises, for noise and hours. Anything involving fuel, chemicals, spraying or vehicle work, because of contamination. Betting, adult and short-term-loan uses, for reputational reasons. Places of worship and single-purpose fit-outs, because the pool of alternative occupiers is small. And any unit that has stood empty for a long time, which tells the underwriter something about local demand.

None of these is an automatic no. Each one narrows the lender list, and each one is a reason to establish appetite before you commit rather than after.

What decides these cases

The commercial tenant, not the flats, usually decides whether a mixed use case is fundable. Buyers spend their time on the residential rent because it is the part they understand, while the underwriter is looking at what is happening on the ground floor.

Access, self-contained units and titles

Physical arrangement matters more than people expect, and it is fixed by the building rather than negotiable.

Separate access. Lenders strongly prefer the flats to have their own street door, independent of the commercial unit. Where the only way into the flats is through the shop, the flats are much harder to let, harder to value as residential and harder to fund, and some lenders will not proceed at all.

Self-contained units. Each flat should have its own kitchen and bathroom and its own front door. Rooms let with shared facilities is a different product with its own licensing considerations, and it should be identified as such rather than described as flats.

Titles. Most mixed use buildings are bought on one freehold title, which is straightforward. Where flats have been sold off on long leases, or where the commercial unit is leasehold within a larger building, the structure needs establishing early. Splitting the title to sell units individually later is a separate exercise, often restricted by the mortgage terms, and it needs planning before you buy rather than afterwards.

Service charges, shared roofs, shared drainage and rights of way through yards or alleys all sit in the same category: ordinary features of these buildings that need to be identified before the legal work, because each one can slow a case down or change a lender's view.

The yield question

Mixed use property is often bought because it produces a better return than a residential flat in the same street. That is frequently true, and it is worth understanding why: the return compensates for the risks set out above. Voids in commercial units last longer, re-letting takes more time and costs more, and the building is harder to sell to an ordinary buyer.

A valuer approaching the building will consider both what the two elements would fetch separately and what the combined investment is worth on its income. Where those two figures diverge — commonly on a building whose commercial rent is well above what the unit would let for today — the lender will take the more cautious view. A high passing rent from a tenant who may not renew does not always translate into a high valuation.

Finding a valuer competent in both halves

This is a genuinely practical obstacle. A mixed use building needs a valuer who can properly assess a trading unit and residential flats, and who understands the local market for both. A residential surveyor asked to value a shop, or a commercial surveyor guessing at flat values, produces a report that is cautious in the wrong places.

We cannot instruct a lender's valuation ourselves. What we can do is ask the lender to instruct a valuer with the right competence, tell the lender what the building actually is before the instruction goes out, and make sure the valuer has the tenancy schedule, the lease and the letting evidence on arrival rather than discovering the building in stages.

Regulation, and where the line falls

Whether the loan is regulated depends on how much of the building is occupied as a home by you or by an immediate member of your family. The threshold is a substantial proportion of the building used as a dwelling by the borrower or an immediate family member, not any residential occupation at all.

So a shop with flats above that you let to tenants is not a regulated mortgage contract. A building where you live in most of the residential space, with a small trading element, may well be. Because it turns on the actual arrangement in the specific building, we confirm it on your case rather than assuming it.

This type of lending is not usually regulated by the Financial Conduct Authority. On unregulated lending you do not have the protections of the mortgage conduct rules and cannot refer a complaint about the lending to the Financial Ombudsman Service.

How we handle a mixed use case

Specialist enquiries reach Nik Mair, our managing director, on the working day they arrive, and we place these cases direct with lenders rather than through a packager.

• We take the whole building first: the trade below, the flats above, the access and the title
• We decide how the case should be presented, because the split determines which lending book it belongs in
• We establish appetite for the ground floor trade before an application is made, not after a decline
• We ask the lender to instruct a valuer competent in both halves, and give them the tenancy information up front
• We tell you where a vacant unit is costing you borrowing today, and what refinancing later would look like
• We set out every cost in writing, including our own fee, before you commit

What we charge

Our fee is typically £495, though complexity moves it, and it is always disclosed in writing before you apply. Each stage of the fee is earned when that stage is reached and is not refundable after that point. Separately, you have the right to cancel within 14 days, as set out in our Terms of Business. We are usually also paid a procuration fee by the lender.