A shop with a flat above can offer two sources of rental income within one investment. The commercial unit may provide a longer lease, while the residential accommodation can diversify income and increase the property’s appeal to investors.
However, the combination of commercial and residential space means the property will not usually fit standard residential or buy-to-let mortgage criteria. It may require a semi-commercial mortgage, with the lender assessing the complete building, its occupants, leases, location and future marketability.
Understanding that distinction before making an offer can prevent an investor from relying on finance that is not available for the property.
Is the property genuinely mixed-use?
A typical mixed-use property might consist of a ground-floor shop with one or more flats above. Other examples include an office with residential accommodation, a café with an upper-floor flat or a small commercial unit combined with a house.
The lender will establish:
- Whether the commercial and residential areas share one legal title
- Whether each part has a separate entrance
- How the accommodation is currently occupied
- Whether the shop and flat have separate leases
- The proportion of the building used commercially
- Whether services, utilities and access rights are separated
- Whether the existing and proposed uses have the necessary consent
If the shop and flat are on completely separate titles, different funding options might be available for each. Where the complete building is held under one title, a semi-commercial mortgage is more likely to be required.
The shop’s business use matters
The type of business operating from the commercial unit can significantly influence lender appetite.
A conventional retail shop, professional office or established local service may be viewed differently from a takeaway, public house, late-night venue or business involving specialist equipment. Some uses can create additional concerns involving noise, odours, licensing, fire safety or the ease of finding another tenant.
The lender may examine the current planning use, the commercial lease and whether the property could be re-let if the existing business left. A strong tenant and suitable lease can support the application, but the lender will not normally assume that the current rent will continue indefinitely.
Investors should therefore consider the building’s long-term commercial appeal rather than focusing only on the present occupier.
How will the property be valued?
A mixed-use valuation is not simply the estimated value of the shop added to an estate-agent appraisal of the flat.
The valuer may consider the property as an investment, looking at the commercial and residential rents, lease terms, operating costs, location, condition and returns expected by investors. Comparable sales can also influence the final figure.
Important factors may include:
- The current and achievable rent for each part
- The length and terms of the commercial lease
- Rent-review and break clauses
- The commercial tenant’s obligations
- The condition of the shop and residential accommodation
- Local demand from businesses, tenants and investors
- Vacant-possession and investment values
- The property’s potential resale market
A lender’s valuation is prepared for lending purposes and may be lower than the agreed purchase price. If this happens, the mortgage amount could reduce and the investor may need a larger deposit.
How is affordability assessed?
For an investment purchase, lenders may consider the rental income from both the commercial and residential elements. They may examine existing leases, market-rent estimates and whether either unit is vacant.
The lender may also consider the applicant’s income, assets, liabilities, property experience and wider portfolio. Limited-company applicants can be asked for company accounts, director information, business bank statements and personal guarantees.
Rental income should be tested against realistic expenditure, including:
- Mortgage payments
- Insurance
- Repairs and maintenance
- Service and compliance costs
- Management fees
- Commercial or residential void periods
- Business rates or council tax where payable by the owner
- Utilities for shared areas
- Professional and legal costs
Two rental streams can reduce dependence on one tenant, but they also create two potential sources of vacancy and additional management responsibilities.
Deposits and borrowing costs
Semi-commercial lenders may require a larger deposit than a standard residential mortgage provider. The amount depends on the property, applicant, occupancy, rental income and lender’s maximum loan-to-value.
Investors should budget for more than the deposit. Valuation fees can be higher for commercial property, and legal work may involve reviewing leases, title restrictions, access, planning and the division between the commercial and residential areas.
Arrangement fees, specialist surveys and environmental investigations may also apply. Property-transaction taxes can be calculated differently for mixed-use purchases, so advice should be obtained from a solicitor and qualified tax adviser before committing.
What if the property is vacant or needs work?
A vacant shop with an uninhabitable flat may not qualify immediately for a long-term semi-commercial mortgage.
Short-term bridging or refurbishment finance might be considered where the investor intends to purchase, complete works, secure tenants and then refinance. That route requires a credible exit strategy based on the expected finished value, achievable rents and the criteria of a potential longer-term lender.
The investor should prepare a schedule of works, quotations, contingency fund and realistic timescale. Planning permission and building-regulation approval may be required, particularly where the layout, access or use will change.
Completing the work does not guarantee the intended valuation or refinancing, so the exit should be investigated before short-term borrowing is arranged.
Complete the legal and property checks
The solicitor may need to examine commercial and residential leases, rights of access, repairing obligations, title restrictions, planning use and responsibility for shared areas.
The property may require separate domestic and non-domestic Energy Performance Certificates. Fire-safety arrangements, asbestos information, utilities and insurance responsibilities should also be investigated where applicable.
A conventional residential conveyancer may not handle every commercial aspect of the transaction. Investors should appoint a solicitor with suitable mixed-use property experience.
Start the finance conversation before offering
A shop with a flat above can be a valuable mixed-use investment, but the mortgage must reflect the complete property rather than only its residential accommodation.
Before making an offer, establish the likely valuation approach, deposit, acceptable commercial use, rental assessment and whether the property requires long-term semi-commercial finance or a short-term funding route.
NetRent Mortgage Solutions works with DNA Financial Solutions to help investors explore semi-commercial mortgages, commercial property finance, bridging and refinancing options.
To discuss a mixed-use property purchase or remortgage, call 01352 721300 or email mortgages@netrent.co.uk.
NetRent does not provide legal advice. This article represents our general understanding of the landlord mortgage and rental property market and is provided for information only.
Mortgage products, rates, fees, valuations and lender criteria can change. Legal and tax treatment depends on the property and individual circumstances. Appropriate mortgage, valuation, legal and tax advice should be obtained before proceeding.