How to get the best rates for a semi commercial mortgage

It’s good news for owners of semi commercial property. If the property is primarily residential, you are more likely to get interest rates closer to residential buy to let mortgage than commercial rates. This could easily represent a saving of in the region of 2% per annum on the interest rate charged.

Can semi commercial get you better rates?

Across the market, there are commercial lenders which have drifted into semi commercial lending and will offer lower interest rates where the property is predominantly residential. Similarly, there are residential lenders which have also drifted and will consider offering residential rates despite there being a commercial element to the property.

Unfortunately, there is no easy calculation as each lender has a different criteria.
Some calculate the residential element based on square footage. Some rely on the surveyors valuation of the commercial versus residential element. Others consider the percentage of commercial versus residential rental income. Calculating the floor area is the most common approach. Remember, if you have flats above commercial premises, the staircase from the ground floor to the upper floor forms part of the residential element which may tip the balance for you in a 50/50 scenario.

It makes sense for the lender and the borrower. Properties with a dominant residential presence are often seen as more stable, and less susceptible to the ups and downs of the commercial market. In essence, they tend to offer a safer investment opportunity, which lenders may acknowledge by extending more favourable mortgage terms.
However, it is important that the residential elements are self-contained with their own separate access.

Proving serviceability of semi commercial mortgages

Again this varies by lender. Those lenders operating in the residential buy to let sector may require the serviceability of the loan to be met 100% by the residential rental income. Others rely mainly on the residential income but we’ll use a small element of the commercial rent. However, there are really great deals of available where 100% of the commercial and residential rent will be considered provided the property has more than a 50% floor area area devoted to residential use.

Proving this income can also get complicated depending on the type of property. If there is a commercial lease in place and the residential elements are let on short alternative agreements, this may be sufficient. However, if the residential element is an HMO, lenders may want an opinion from a local letting agent or accounts. This is because there may be additional costs incurred by the business to run an HMO. These need to be factored into the serviceability calculation.

Similarly, if the residential element is used for service to accommodation, there will be even greater reliance on the accounts. This is due to the wide variety of costs which could be incurred in this model which the lenders can’t easily predict.

Bear in mind, each lender will apply a debt service coverage. These tend to vary between 125% and 155% depending on the property type, limited company or personal ownership and the tax banding or the owner. As an example, at 125%, if the annual proposed mortgage payments are £100,000 per annum, the lender would want to see a rent of £125,000 per annum.

How a good Energy Performance Certificate can help

Energy Performance Certificates (EPCs) are becoming a consideration for more and more lenders. Many are therefore offering discounts on the interest rate for properties which comply with higher EPC bandings. In scenarios where properties are being refurbished, lenders are also offering discounts. For example; if the refurbishment will result in an improvement in the EPC banding. However, don’t assume the discount is automatic as the lender best suited to you may not be offering discounts. Also, there is the question of the EPC’s potentially being required for both the commercial and residential element. Talk to your broker at an early stage to understand whether upgrading your property prior to applying might be beneficial.

Larger semi commercial loans

Commercial and semi commercial mortgages are relatively complex transactions. Therefore some lenders have decided to only get involved if the loan amount meets their minimum requirements. Someone to get out of bed for less than a £1 million loan.
A few will lend as little as £50,000. For loans of less than £150,000 the choice of lenders is quite restricted. £150,000 to £250,000 adds a few more lenders. Above £250,0000 the options increase and you can expect to be offered a good choice of features and rates

Have you got experience as a landlord?

Your role as a landlord carries considerable weight. Especially when buying semi commercial property. Lenders are not merely concerned with your ability to meet mortgage obligations but also with your competency in managing the property effectively. This preference naturally gravitates towards borrowers with a proven track record in the commercial or buy-to-let sectors. Such individuals have demonstrated the ability to navigate challenges posed by tenancy, vacancies, and property management. Their expertise serves as a guarantee of reliability in the eyes of lenders, positioning them more favourably to secure advantageous mortgage terms.

Check your Credit history

On the other side, borrowers with unresolved credit issues or a patchy credit history may encounter challenges to securing favourable mortgage rates. Lenders delve deeply into your financial past, analysing your bank statements. They scrutinize your credit reports for signs of consistent payments and sound financial behaviour. The reasoning here is straightforward. A strong credit history is a testament to your financial responsibility and reliability. this helps assure lenders that you are a safe bet for their investment. Conversely, a poor credit history can raise red flags, potentially resulting in higher interest rates or even outright loan rejections. For example, do your recent bank statements show missed payments, returned direct debits or use of an authorised overdrafts? It would be wise to clear this up before applying. Similarly any court judgments, defaults or arrears which have not been satisfied or brought up to date will count strongly against you.

Having enough for a good deposit

The loan-to-value (LTV) ratio is central in shaping your mortgage terms. If you wish to access the wider market, you’re starting point should be to expect a maximum LTV of 75% of the vacant possession value of the property. Whilst there are some lenders willing to lend against the Investment value of the property, they are less common and more stringent. The Investment value, or going concern value will be relying on a proven track record.

Interest rates for semi commercial property

For semi-commercial properties, the spectrum of interest rates often spans from below 6% to approaching 10% depending on the circumstances. The main levers are loan amount, borrower experience, rental yield, LTV, credit history and property type.

Importantly, the world of interest rates isn’t static. At the time of writing this article, base ratings at 4.5%. It is a dynamic arena, with a variety of repayment options. Some lenders offer amortizing repayment plans which progressively chip away at the principal and interest over the loan term. Others use interest-only schemes. The latter option offers lower monthly payments which in turn improve serviceability and loan amounts available. However, it’s wise to be careful, as it defers the bulk of the repayment to a later date. This can hold strategic significance, particularly for those seeking to maximize their borrowing capacity and financial flexibility.

Conclusion

In conclusion, getting a mortgage for a semi-commercial property is an important decision with a wide range of considerations. Where each step is influenced by many variables, and success hinges on your ability to navigate these complexities with insight and preparation. To improve your prospects of securing a mortgage with better terms. You should have meticulous organization of your financial records, a substantial deposit, a good credit history, and ideally some experience being a landlord. I hope you found this guide interesting and helpful. If you need any more information please find more on our website or call us at 01902 585020.