Getting a Mortgage on a Flat Above a Shop

When you’re looking for a new home, buying a flat above a shop or a house next to a commercial premises can give you great value for money.

But, before you make an offer, you should be aware of the challenges people face when trying to get a mortgage on this type of property and what steps you can take to overcome them.

In this guide, you’ll learn whether it’s possible for you to get a mortgage on a flat above a shop, how to get one, and how a specialist broker can help you do it.

Can you get a mortgage for a flat above a shop?

We’ll start with the good news: yes, you can. But you also need to know that you might have fewer lenders to choose from, as not all of them will approve this type of mortgage.

The category of business your chosen home borders will be a deciding factor in how many mortgage deals are available to you.

There are five main categories of commercial property:

• Class A1 – retail outlets
• Class A2 – professional services
• Class A3 – food and drink
• Class A4 – drinking establishments
• Class A5 – hot food takeaway

Generally, lenders consider homes close to businesses at the top of that list (i.e. shops and offices) most favourably.

They consider homes close to businesses at the bottom of the list (i.e. restaurants, pubs, and takeaways) least favourably.

There are then several other classes of commercial property, which are considered differently by different lenders:

• Class B – light industrial properties, and storage and distributions facilities
• Class C – commercial residences, such as hotels and nursing homes
• Class D – leisure facilities, such as cinemas and gyms

Who will lend on flats above shops

There are a number of lenders who offer mortgages for flats above shops, including NatWest and Halifax.

However, these lenders have specific criteria that the property must meet, such as:

• Having suitable access and security
• Being self-contained and separate from the business premises
• Having a separate title deed from the business premises

It’s risky to apply directly to a lender if you’re not sure of their criteria, so you’ll have a higher chance of approval and securing the best rates by working with a broker who has access to that information and can match you with the ideal mortgage provider for you, first time.

How to begin your mortgage application

Given the small market for mortgages like these, we recommend the following approach:

1. Find a broker with experience in this area

By working alone, you’ll risk declined applications from numerous lenders, which can temporarily impact your credit score and delay the process of buying your home. Working with a specialist broker ensures that you only apply to lenders who typically approve applications like yours.

2. Discuss your specific requirements

Which mortgages you’re eligible for will depend on the exact features of the home you hope to buy.

Your broker will ask you about:

• The nature of the business it borders. Some lenders will approve a mortgage for a flat above a shop but not above a pub or takeaway.
• The opening hours of the business. Some lenders will decline your application if the premises is open late at night.
• The position of the property. Some lenders will approve a mortgage for a flat above a shop only if there is at least one floor between the two.
• Other features that could affect your application, such as a shared entrance with the business or other shared facilities.

3. Identify the right lender and mortgage deal

Your mortgage broker will find the best rate on your behalf, with access to many more deals than you’d be able to find yourself. They will explain each of your options transparently and in detail so you can make an informed choice.

4. Ensure you meet the eligibility requirements

Your broker will make sure that you fit your lender’s criteria, including the deposit they demand for a home like yours (which, as we’ve mentioned, may be higher than a typical deposit). Lenders will also base their decision on your:

• Income
• Age
• Employment status
• Credit history

You can check what they’ll see in your credit history by downloading your credit report.

5. Make your application

Now, you’ll be ready to make your application. If necessary, your broker will negotiate directly with the lender about your specific requirements, as decisions like these are sometimes made on a case-by-case basis. With their help, you have a good chance of first-time success.

Challenges you’ll face

Mortgage lenders are always concerned with how easily they can recoup their money if you fail to make your mortgage repayments and they have to repossess your home.

This presents two challenges you’ll need to overcome….

1. Down-valuation

Lenders consider homes near commercial properties more difficult to sell, because:

• They can be less pleasing to look at than conventional residential properties
• There may be issues with noise from deliveries, customers, or business activities
• There may be issues with the smell of food or garbage

You’ve probably considered these factors as part of your decision to buy the home. While you’ve decided they’re acceptable, your lender may feel differently and may value the property at less than you’ve agreed to pay. This could result in your mortgage being declined at valuation.

2. Low loan-to-value ratio

If a mortgage lender considers a property difficult to sell, it would be a high risk to lend you 90% or 95% of its value. In the scenario that your home had to be repossessed, the lender might not easily make back all of their money.

To lower that risk, they might only offer to lend you 75% or 80% of the property value, or even less if it borders a business other than a shop or office. To buy your chosen property, you may need a larger deposit than normal.

Advantages of buying a home above a commercial property

While we’ve covered many negatives, it’s also worth mentioning that a flat’s position above a shop or business can sometimes be an asset.

You might find that the business makes a better neighbour than a private resident would.

The business may only be active 9-5, for example, allowing you peace and quiet in the early mornings and evenings, when other neighbours would usually be home.

And, if the property is in a city centre, you might appreciate the convenience of being surrounded by businesses and amenities.

Renters tend to like this too, so if you’re buying to let, this could increase your rental income. For these reasons and more, you may still be keen to apply for a mortgage.

What if you’d like to buy the commercial premises as well?

There may be some instances in which you’d like to buy the commercial premises as well as the residential property it borders.

If so, you can consider a commercial mortgage or semi-commercial or ‘mixed-use’ mortgage.

The application process is a little different to applying for a residential mortgage:

• You’ll need to provide evidence of your company’s net worth, business income and expenditure, including three years of financial records
• Your lender may need to see a business plan for the business you intend to run from the premises
• They may want information on any debentures and personal guarantees from company directors
• The arrangement fees, valuation fees, and legal fees are usually higher because of the additional work that goes into these mortgages

Still, you can follow the steps we’ve detailed above on how to begin your application, and your broker will assist you with all of these details.

Finding the right mortgage broker

It’s easy to see that, with the complex nature of these mortgages and negotiations, a lot rests on your choice of broker.

Having the right person to present your case can tip the balance in your favour when the lender makes their decision.

That’s why we offer a free broker-matching service.

We work with dozens of brokers, who are all vetted and trained by us and have different areas of expertise. So if you need a mortgage on a flat above a shop or a house next to a commercial property, we’ll match you with a broker with the relevant experience.

For a free, no-obligation chat with an expert, call us today on 0808 189 0463 or make an enquiry through our website.