Semi commercial mortgage: finance for mixed-use property

A semi commercial mortgage is a loan secured on a single property that contains both commercial and residential space, repaid over a term of years rather than months. Typical examples are a high street parade unit with a flat above, a pub-style building converted to a shop and maisonette, a mews office with living space, or a corner building with a retail unit and several flats on the upper floors.

Lenders treat these buildings differently from a pure commercial mortgage because the security has two income streams and two sets of buyers if it ever has to be sold. Some lenders that are comfortable with shops will not touch residential tenancies; some residential specialists will not consider a commercial lease. The semi-commercial market is made up of the lenders willing to value and lend against both parts together.

How it works in practice

• Purchase or refinance. You can use it to buy a mixed-use building, or to refinance an existing loan or bridge on one.
• Owner-occupier or investor. You might run your own business from the ground floor and let the flats, or let both parts to tenants as an investment.
• Term and repayment. Terms are often between five and twenty-five years, on a capital and interest basis, interest-only, or a mix, depending on the lender and the case.
• One charge, one building. The lender usually takes a first legal charge over the whole property, not separate charges on each part.

A semi-commercial mortgage suits a business or investor buying a mixed-use building that will be let or traded from, where the residential part is not the borrower's own home. It is a strong fit for:

• Retailers, hairdressers, takeaways and professional firms buying the premises they trade from, with a flat above that is let separately. Our retail business loans page covers the working capital side of running the shop itself.
• Investors buying a let parade unit with let flats, who want income from both parts. Where the whole building is commercial, an investment mortgage is usually the closer fit.
• Limited companies and SPVs holding a mixed-use asset for the long term.
• Owners refinancing a mixed-use property bought with short-term finance, once works are complete and tenants are in.

It is usually not the right route if you or your family will live in the flat (see the scope note above), if the building still needs major works before anyone can occupy it, or if you are buying a purely residential block. In the first case the regulated market applies; in the second, a bridge first is common; in the third, the building sits outside the commercial lending market we cover.

A semi-commercial mortgage typically takes several weeks from application to completion, and often longer where leases, tenancies or title need work. Indicative terms can come within a few working days in straightforward cases. After that, the main steps are the lender's valuation (which covers both parts of the building), underwriting, and the legal work, where each lease and tenancy is reviewed. Timings depend on the lender, the valuer's availability, the condition of the title and how quickly documents arrive. If you are buying at auction or against a fixed deadline, a bridging loan followed by a semi-commercial refinance is often the safer plan.

Security for a semi-commercial mortgage is almost always a first legal charge over the whole mixed-use property. Where the borrower is a limited company or SPV, lenders often ask for personal guarantees from the directors and sometimes a debenture over the company. Additional security over other property may be requested where the deposit is small or the income is thin. Our guide to personal guarantees explains what you are signing and how guarantees can sometimes be limited.

The costs of a semi-commercial mortgage come from interest plus a set of one-off fees, and pricing reflects the building, the income and the borrower rather than a published rate card.

• Interest. Fixed for an initial period or variable, often linked to Bank of England base rate or a lender's own reference rate.
• Arrangement fee. Charged by the lender, often added to the loan or paid on completion.
• Valuation fee. Paid upfront; mixed-use valuations can cost more than a single-use report because both parts are assessed.
• Legal fees. Your solicitor and usually the lender's solicitor, with extra work for each lease and tenancy.
• Early repayment charges. Common on fixed-rate deals for part or all of the fixed period.

Purchase taxes are separate from the mortgage. In England, mixed-use purchases are generally charged at non-residential rates of Stamp Duty Land Tax, but the rules have detail and change from time to time, so take advice from your solicitor or accountant. You can model repayments with our commercial mortgage calculator.

The main alternatives are a standard commercial mortgage, short-term bridging, or a secured business loan, depending on the building and what you need the money for.

• Commercial mortgage: if the residential part is minor or will be converted to commercial use.
• Investment mortgage: for let commercial property where the building is primarily commercial.
• Refurbishment finance: if the flats or shop need work before they can be let, followed by a refinance.
• Commercial property refinance: if you already own the building and want better terms or to release equity.
• Secured business loans: for business purposes where you want to borrow against property you already own.