Mortgages Next to Commercial Property

Many lenders will provide mortgages for residential properties situated near a commercial business. Let's first look at the pros and cons to consider when buying a property in these circumstances.

• Living in a central location means you'll have the convenience of being close to a range of facilities such as public transport, restaurants and shops
• Residential properties near businesses tend to be cheaper than those in entirely residential locations
• Your neighbours could be the owners of the business. With an invested interest in running the business long term, they’re likely to be quiet and respectful neighbours
• Houses and flats in desirable locations within city centres can often provide high rental returns
• Many businesses, such as offices, are unlikely to be in use overnight or at weekends, reducing the impact of traffic and noise

• It can be challenging to sell homes in commercial areas which might have more volatile market values
• Factories and food businesses such as restaurants can be noisy and release strong odours
• Commercial properties often have large advertising boards, large commercial waste bins or very bright lighting that can be disruptive to neighbouring properties
• Deliveries can happen very early in the morning and/or very late at night

Lenders will have a valuation done on the property and will look at your individual circumstances when considering your mortgage application.

For example, they’ll consider:

• Your age
• Your credit history
• Your income
• What type of property do you want a mortgage for
• What commercial premises are nearby

Your lender will want to assess the type of commercial premises the property you're looking to buy is in the vicinity of. Lenders categorise commercial premises by risk. The lowest is Class A1, and the highest category, with greater risk and requiring a more complex mortgage application, is Class A5.

• Class A1: Shops and retailers
• Class A2: Businesses and professional services
• Class A3: Food and drink outlets
• Class A4: Bars and pubs
• Class A5: Hot food and takeaways

Most lenders will require you to put down a minimum deposit of 5% - 10% of the property's purchase price. This means the maximum LTV (loan-to-value) available is 90% - 95%.

Some lenders may ask for a bigger deposit if the property is next to or above a Class A5 business but this will depend on their criteria.

You may need to provide a larger deposit depending on the lender and your circumstances. For instance, if you have a bad credit history, a lender may want to know what affected your rating. This will help the lender determine the likelihood of your ability to pay your monthly mortgage repayments. They may ask you to put down a larger deposit as per their criteria.

When a borrower has a bad credit history, there's a greater risk to the lender that the borrower won't meet their mortgage repayments. However, that doesn't mean that you won't be able to get a mortgage on a home near a commercial property.

If you do have a poor credit history, it's a good idea to spend a few months working on improving it before applying for a mortgage. Adverse lenders will consider mortgages even if you have a bad credit history, but they’ll likely charge at higher rates. An independent mortgage broker will be able to advise on which lenders are more likely to consider you for a mortgage.

Buy-to-let mortgages are available for flats above businesses. Most lenders will require you to put down a deposit of at least 25% of the purchase price.

See our page on buy-to-let mortgages and our guide on mortgages for flats above shops for more information.

It's common for a flat next to a business to be a leasehold property, with the neighbouring business owner owning the freehold. This may mean that there's a fixed period to how long you can live in the property, usually from 125 years. At the end of this period, the property's ownership reverts to the leaseholder or freeholder.

If the business owner owns the freehold, you'll be required to pay them ground rent and service charges, alongside your mortgage. Whoever owns the freehold is responsible for repairs to the building and communal areas. They must also pay the building's insurance and be responsible for dealing with any anti-social neighbours, if necessary.

What size mortgage a lender will offer you will depend what you can afford. Most mortgage lenders set their own lending criteria, but lenders will usually base your maximum borrowing on 4.5x your income.

The maximum LTV for a mortgage on a flat above a business is typically 80% - 85%.

If you're interested in buying the commercial premises and the adjacent residential property, you can consider applying for a commercial, mixed-use or semi-commercial mortgage. The application process for these mortgages is different from applying for a standard residential mortgage. You'll be required to provide proof of your business's net worth, income and expenditure, plus 3 years of financial records. Your lender may also ask to see a detailed business plan for the business you plan to run from the property.

If you want to buy a residential property near, above or adjacent to commercial properties, contact John Charcol. Our expert advisers can help you find the right mortgage for your circumstances. Contact our team today on 0330 433 2927 or submit an online enquiry.