Flats above shops or commercial properties offer certain benefits that appeal to many buyers; they’re often in central locations, near amenities and can be found at lower prices than other flats in the area. However, getting mortgages on these flats can be slightly more complex than getting mortgages on other types of homes.

In this guide, we'll look at what kind of mortgages you can get for a flat above a shop, as well as how to ensure you get a good offer.

Can You Get a Mortgage for a Flat Above a Shop?

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.

How Much Could I Borrow for a Flat Above a Shop?

As with most residential mortgage types, lenders typically lend around 4.5x your income. This multiple is for everyone on the mortgage, so buying with a partner can help you afford more. It’s the same whether you’re employed or self-employed.

The maximum LTV (loan-to-value) typically offered on residential properties is 90% - 95%, but some lenders may limit the maximum LTV (loan-to-value) to 75% for flats above certain types of commercial premises – e.g. a takeaway or drinking establishment - which means you may need to provide 25% in deposit as opposed to 5% or 10%.

Second Home Mortgages for Flats Above Shops

Getting a mortgage for a flat above a shop as your second home should not be much harder than getting any other residential second home mortgage. If you're still paying a mortgage on your primary home, you may be expected to put down a higher deposit amount and pay a higher interest rate. Second homes are considered a higher risk as, if someone faces financial difficulties, they're more likely to default on the mortgage for their second home.

Buy-to-Let Mortgage Flat Above Shops

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.

How Is Affordability Calculated for Buy-to-Let Mortgages?

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.

Can You Get a Mortgage for a Flat and the Shop Below It?

If you're looking to purchase both the flat above a shop and the shop, there are a couple of different options:

Semi-commercial (hybrid) mortgage: though these are uncommon, some lenders will offer semi-commercial mortgages. Semi-commercial mortgages can be suitable if you want to let out the flat upstairs and the commercial space downstairs. A broker will be essential to finding these mortgage types as they’re often complex and require specialist lenders who only operate through an intermediary.

2 mortgages: if you intend to live in the flat upstairs but let out the commercial property then you would want to consider getting 2 separate mortgages - a commercial mortgage for the shop and a residential for the flat. This would involve splitting the title deeds and affordability calculations for 2 separate mortgages which can make it a much more complex process. If this is something you want to consider definitely speak to a broker like John Charcol as we’ll be able to help you manage both applications and advise you on your options.

Mortgages for Small Flats

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.

Is It Hard to Get Insurance for a Flat Above a Shop?

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.

How Much Deposit Will You Need for a Flat Above a Shop?

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.

Finding Banks for Mortgages of Flats Above Shops

Trying to mortgage a flat above a shop can be more challenging depending on the exact circumstances. The best way to find a mortgage lender is to go through a specialist mortgage broker like John Charcol with experience mortgaging this kind of property. Mortgage brokers can help borrowers get access to lenders who only work through intermediaries. This whole of market access means that our advisers can help borrowers get the best deals possible when applying for a mortgage.

Why Do Some Lenders Not Offer Mortgages for Flats Above Shops?

Mortgage lenders consider the saleability of the property when deciding whether to lend on it. This is because the property needs to act as security against the loan — if the property loses value or is hard to sell, then the mortgage lender's capital is at risk. This means that getting a mortgage is highly dependent on the area, the type of shop, and other factors — more so than most other types of houses.

Mortgages for Flats Above Shops - The Bottom Line

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.

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