Mortgages for Flats Above Shops

Yes, there are many lenders who are willing to offer mortgages on flats above shops. Which lender is right for you will depend on the exact details of your purchase. Going through an expert mortgage broker like John Charcol can help make sure that you find a mortgage that suits your needs, especially in the case of more difficult applications.

The main factor affecting the products available to you when trying to get a mortgage on a flat above a shop is whether you want to buy the property as a home or a rental opportunity.

You’ll be eligible for a standard residential mortgages if you’re planning to use the flat as your primary home. However, you might find that the minimum deposit requirements and interest are higher due to a flat above a shop appearing less desirable to lenders. This is because most lenders judge whether to accept a mortgage application on the saleability of the property. If you default on your payments and the flat has to be sold to cover the lender's investment in the property, they ideally want it to sell easily and quickly, which is harder to do if the flat is less desirable.

Flats above shops can have limited saleability due to the higher risk of loud noise, smells, noise at unsociable hours, or drunken behaviour, in the cases of takeaway shops or drinking establishments. Some mortgage lenders will not accept applications on flats above shops as they fear the property could lose value. Nonetheless there are many lenders that will consider applications for flats above shops. The lenders that will consider these applications have different criteria and rules related to the business’ commercial property use class.

Ultimately, finding the right lender for your situation will depend on the lender’s criteria, the property and the surveyor’s comments from the mortgage valuation.

If you want to mortgage a flat above a shop as a rental opportunity, a buy-to-let mortgage will be necessary. A buy-to-let property is let out on a minimum of 6 – 12 month basis to the same tenant(s).

Most buy-to-let mortgages are interest-only, so you only pay the interest on the loan each month. You pay off the original loan amount at the end.

For a buy-to-let mortgage, affordability is worked out using the projected rental income for the property. You’ll need to give your broker or lender a rental income estimation so that the lender can use this to calculate what you can afford in monthly interest payments. Lenders typically ask for rental income to be between 125% and 145% of the monthly interest payments. They’ll conduct a stress test using an interest rate of about 5% to ensure you can cover any fluctuations. The lender will also look at your personal income to make sure you’ll be able to cover any periods when the property is vacant.

Most mortgage lenders have a minimum size requirement for mortgage applications. For flats under 30 square meters, it will be necessary to find a specialist mortgage lender that doesn't have a minimum size requirement. These lenders will be guided by valuers' comments as well as details of values in the local area. For undersized flats, it can be hard to get a mortgage without a broker.

Having proper home insurance is a requirement for getting a mortgage. Getting insurance on a flat above a shop is usually the same as getting any other residential insurance. However, you might find that your insurance cost is higher if the shop adds additional risk to your property. For example, a flat above a takeaway shop might be at a higher risk of damage, which could increase your insurance premiums.

The exact deposit amount you need will depend on several factors. Whether you’re buying the flat as your primary residence, secondary residence, or an investment opportunity will also have an impact.

If you’re buying a flat above a shop as your primary residence, you may find that the deposit required is higher than on standard residential properties. Most lenders require a minimum deposit of 15%, though this will depend on the commercial property use class, which follows the guidelines below:

• A1 - Shops including hairdressers, post offices, pet shops, sandwich shops, etc.
• A2 - Financial and professional services including banks, estate agents, etc.
• A3 - Restaurants and cafés
• A4 - Pubs and bars
• A5 - Takeaways

Typically, the higher the classification of the shop underneath your flat, the higher the deposit amount that will be required. For example, a minimum 25% deposit is likely to be required for a flat above a restaurant, or 40% for one above a takeaway. This is due to the property being classed as riskier if they are near commercial units that cause more noise, smell and air pollution, or have a risk for antisocial behaviour at unsociable hours.

In most cases, getting a mortgage for a flat above a shop is similar to getting a standard residential mortgage. However, due to the riskier nature of this kind of property, the deposit amount could be higher, especially for flats above properties with a higher commercial use rating.

Here at John Charcol, we have expert mortgage advisers with experience in getting mortgages for flats above shops. Whatever type of property you have in mind, we can help you find a suitable mortgage. Get in touch today on 0330 433 2927to see how we can help, or check out our house buying guide for more information.