Living and working in one property – Semi-Commercial mortgage

Sometimes it happens that there is a need to use one property for both residential and commercial purposes. When a mortgage is involved, the owner’s options are limited because the mortgage agreement specifies in detail what the property may be used for. In this article, we will discuss the most important issues related to such situations and explain what a mixed mortgage, or Semi-Commercial Mortgage, is.

What is a semi-commercial mortgage?

There are situations in which a single property can be both someone’s home and a company headquarters or commercial premises. This raises doubts. With a residential mortgage, the terms usually require the property to be used as your home, so running a business from it without your lender’s agreement could breach your mortgage conditions (there are some exceptions, which you will read about later in this article). Commercial mortgages, on the other hand, are generally not designed for property that is used as a home.

The solution to this problem is a mixed mortgage, or semi-commercial mortgage. It is a product designed specifically to finance properties intended for both commercial and residential use. Lenders look at how much of the property is residential and how much is commercial, because this affects how the loan is regulated and which lenders and products are available.

The way affordability is assessed differs between residential and commercial mortgages. For a residential mortgage, the lender assesses your personal finances, and affordability checks are regulated by the FCA. For a commercial mortgage, the assessment focuses primarily on the company’s financial situation. A loan secured on commercial property is not a regulated mortgage contract unless the borrower is an individual (or trustee) and at least 40% of the property is used, or intended to be used, as a dwelling. Below that level, the loan is usually treated as unregulated commercial lending.

How a lender assesses the loan depends on who is borrowing and how each part of the property will be used. A few illustrative cases:

• Example 1: The borrower is self-employed (e.g. a vet) and wants to use 40% of the building for their surgery and live in the rest. Because at least 40% of the property would be used as the borrower’s home, the loan would normally be a regulated mortgage contract, so the lender would apply the FCA’s residential affordability rules while also looking at the income from the practice.

• Example 2: The borrower is an investor who wants to buy a shop with a flat above and let out both. They would usually need a lender that offers semi-commercial or commercial investment lending, and the lender may consider both the commercial rent and the residential rent. (Letting a flat on its own is covered in our guide to the Buy-to-Let mortgage.)

• Example 3: A limited company wants to buy warehouse space with accommodation for its staff. This is an unusual case, because a limited company cannot ‘live’ in the building, so a lender may ask for a larger deposit, personal guarantees or asset details from the directors. The case is quite niche, but it illustrates how a lender may approach a less typical financing need.

Specialist lenders set their own criteria, deposit requirements and terms, so the approach differs from lender to lender.

You must remember that such a product is not available at every bank and has a rather complex structure. Therefore, if you are considering this type of financing, it is highly recommended that you use the services of an experienced, comprehensive credit advisor from Extend Finance, who will help you choose the right offer. Feel free to contact us – our advisers will be happy to explain the entire process in detail and help you find a favourable mortgage.

In what situations should I consider a Semi-Commercial Mortgage?

A semi-commercial mortgage is used when a property has both residential and commercial parts. There are several examples of situations in which a borrower deals with such a property, and below are two common examples:

• Any situation where the property is a building with a typical commercial premises on the ground floor and a flat on the upper floor (or vice versa) – such a property is typically financed with a semi-commercial (mixed-use) or commercial mortgage. How each part will be used affects which type of financing is suitable.

• The borrower runs a business and would like to use part of the property (e.g. a room in the house) for business purposes – working from a spare room often does not require a different mortgage, but check your mortgage terms and ask your lender before you start.

Planning Permission

A very important aspect in the context of semi-commercial mortgages is planning permission. The use classes described in this section apply in England; Wales, Scotland and Northern Ireland have their own planning rules. The council’s planning records and the property’s planning history show its lawful use. For example, in England a single-family house falls within use class C3 (dwellinghouses). At the same time, the Land Registry contains a description, e.g. Freehold house and premises.

When taking out a mixed mortgage, you need to make sure that the use of the building is appropriate and that the entries in the council records will not interfere with the buyer’s plans. Before applying for a mortgage, with the help of a solicitor or conveyancer, you should contact the council and make sure that you can use the property as intended. If it turns out that the planning permission for the property does not allow for the intended use of the building, the potential buyer can apply for a Change of Use, i.e. permission to change the class of the property.

For example, in England, a change from a Class E use such as a shop to a general industrial use (Class B2) needs planning permission, whereas a change between uses within Class E, such as from a shop to an office or a light-industrial workshop, is not development and does not need permission. So if you want to buy a property with a shop on the ground floor and use it for general industrial work, you would need to apply for planning permission. Lenders will usually want to see that the intended use has planning permission, or does not need it, so check this with your solicitor or the council before you apply for a mortgage.

I already have a mortgage – what are my options?

If you want to start working from a home that was bought with a residential mortgage, there are a few things you need to consider. The situation is quite complex, as there are no clear boundaries as to when a residential mortgage needs to be converted into a mixed mortgage, and each situation is considered by the lender on a case-by-case basis.

Residential mortgage terms usually require the property to be used as your home, so check your mortgage conditions. Some lenders may agree to limited business use, such as working from a home office, if you ask them first. When you contact your lender, explain clearly:

• whether employees or clients will visit;

• whether there will be extra traffic, deliveries or noise;

• whether any part of the home will be converted into commercial premises;

• whether the property will be advertised as open to customers.

If your plan involves converting one room into a space where you receive clients (e.g. an office), some lenders may agree to this without a remortgage, so it is worth contacting your lender and explaining your plan in detail.

With this type of change, make sure that the property’s use class is compatible with how you use it. If a property is used in a way that needs planning permission and does not have it, the local planning authority can take enforcement action. Before talking to your lender, it is therefore a good idea to contact the council first to make sure that your activities are legal.

Summary

A mixed mortgage, or semi-commercial mortgage, is a product that allows you to purchase a property that is partly residential and partly commercial. Specialist lenders assess the whole property, including how each part is used and any business or rental income, and their criteria and terms vary. It should be remembered that each property has a lawful use – to use it for a materially different purpose, you may need planning permission for a change of use from the local council (the use classes described above apply in England; Wales, Scotland and Northern Ireland have their own planning rules). If the property is used in a way that needs planning permission and does not have it, the local planning authority can take enforcement action.