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 – in the case of a residential mortgage, starting any business activity in the property will usually constitute a breach of contract (usually, because there are some exceptions, which you will read about later in this article). On the other hand, when it comes to commercial mortgages, agreements strictly prohibit the conversion of any part of the property into residential space.

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.** The most important feature that distinguishes this type of mortgage is the clear percentage distribution between the residential and commercial parts. It is on this basis that your creditworthiness (your affordability) will later be assessed and the final mortgage offer will be prepared.

The method of assessing creditworthiness differs between residential and commercial mortgages. In the case of residential mortgages, the customer’s financial situation is assessed, and the process itself is strictly regulated by the FCA. In the case of commercial mortgages, on the other hand, the FCA does not regulate such transactions at all, and the assessment focuses primarily on the company’s financial situation. Combining these two types of mortgages into one product required coming up with a way to realistically assess credit risk using both methods at once.

The principle is always similar –** after dividing the property into residential and commercial parts, two separate creditworthiness assessments are carried out,** which are more or less similar to each other. Let us consider a few cases:

• Example 1: The borrower is self-employed (e.g. a vet) and wants to use 40% of the building to open their surgery. In this case, 60% of the property will be assessed as a standard residential mortgage, and the other part will be assessed as an Owner-Occupier Commercial Mortgage. In this case, the assessment of the financial situation of both the individual and the company will relate to a single entity (sole trader), but will be considered in two different ways.

• Example 2: The borrower is an investor who wants to purchase a building with commercial premises on the ground floor and a flat on the upper floor. In this situation, the first part on the ground floor will be considered a Commercial Buy-to-Let Mortgage, and the second part upstairs will be treated as a standard Buy-to-Let mortgage.

• Example 3: An LTD company wants to purchase warehouse space with a residential part for employees. Here, the situation is more complicated because an LTD company cannot ‘live’ in the building. A mortgage may be granted for the residential part, but due to the unusual situation, the bank may require a larger deposit or a statement of assets from the directors. The commercial part is analysed as an Owner-Occupied Commercial Mortgage. This case is quite niche, but it illustrates well how banks treat individual financing needs.

After analysing your creditworthiness from the appropriate angle and applying the relevant criteria in both cases, the mortgage offer is combined into a single package. As you can see, the whole process is quite complicated, but fortunately, the bank is responsible for making the relevant calculations.

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 we present the two most common ones:

• 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) – in this case, financing will always be provided through a mixed mortgage. It will only be necessary to decide on the purpose of both parts – this will determine the choice between the types of financing appropriate for each of them.

• The lender runs a business and would like to use part of the property (e.g. a room in the house) for business purposes – in this situation, they will most likely choose a mixed mortgage.

Planning Permission

A very important aspect in the context of semi-commercial mortgages is the issue of planning permission. In the local council’s records, each property has a document that specifies its permitted use and possible changes in use. For example, a single-family house is assigned class C3, which means that it is a residential building. 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, they should contact the council and make sure that they 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, let’s say you want to buy a property that has a Class E (Retail) rating on the ground floor, which is commercial and only allows for the opening of a retail premises. However, you would like to open a small workshop there, where you will produce custom-made gloves. In this case, you must apply to the authorities and request a change of use to class B2 (General Industrial). You should only apply for a mortgage after obtaining such a permit or information that it will definitely be issued.

I already have a mortgage – what are my options?

If you want to start working from home that was purchased 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**. Although each situation is considered by the bank on a case-by-case basis, there are a few universal, general rules that can be taken into account.

Most mortgage agreements contain explicit clauses stating that** the property is to be used exclusively for the customer’s residential purposes**. In practice, however, it often happens that the bank allows small-scale business activity to be conducted from home. An accepted home-based business usually means that:

• no employees come to the building;

• there is no heavy customer traffic, deliveries or noise;

• no part of the house is converted into a typical commercial premises;

• the building is not advertised as premises ‘open to customers’.

Many entrepreneurs running small manufacturing or service businesses, especially online, meet these criteria.

Additionally, even if your home working plan involves converting one room into a space where you receive clients (e.g. an office), there is a chance that you will not need to remortgage for a semi-commercial mortgage. Banks often grant such permissions, so it is worth contacting your lender and explaining your plan in detail.

With this type of change, you should always remember to ensure that the building class is compatible with its use. The council always has priority over the bank’s decisions and can severely punish activities that are not compatible with the assigned property class. Before talking to your bank, 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. The credit assessment is then divided into two parts, proportional to the value of each part of the property, and then combined into a single offer. It should be remembered that each property has a specific purpose – to change it, you need to go to the council and obtain a Change of Use. If the use of the building does not comply with its purpose, the council may impose penalties.