How to convert a home mortgage into a commercial one?

Ever thought of turning your home into a fully-fledged business? 

We’ve all seen the occasional commercial property show up in our residential communities; whether it’s a corner shop, a cafe, Airbnb accommodation, a hairdressers, or perhaps a private doctor or dental surgery.

Perhaps you’ve considered joining them; but you’re not sure how your current mortgage fits into your plans. Let’s talk about home mortgages, commercial mortgages, and how you could turn one into the other…

What are commercial mortgages?

Firstly, let’s outline what ‘residential’ and ‘commercial’ mean in this context:

• A residential property is for living in. Of course, your home is a residential property, but most buy-to-let properties are residential too.
• You’ll typically purchase your home with a standard residential mortgage (otherwise known as a home mortgage).
• A commercial property is used to run a business. This includes things like offices, warehouses, industrial facilities, retail shops, restaurants, hotels and even holiday lets. If you want to buy a commercial property to run a business, you’ll need a commercial mortgage.
• Buy-to-let mortgages are technically commercial mortgage products, but most of them are designed for buying residential buy-to-lets. If you want to purchase a commercial property to rent out to commercial tenants, you’ll need a specific commercial buy-to-let mortgage product instead.
• Mixed-use properties (or semi-commercial properties) contain a mix of commercial and residential sections. The classic example is a shop with a flat situated upstairs. 
• For mixed-use properties, you’ll typically need a dedicated semi-commercial mortgage product. (Not all business ventures will push a residential property into mixed-use territory; for example, most home mortgage lenders will probably be fine with you running a freelance business from your bedroom.)

Can you turn a home mortgage into a commercial mortgage?

Yes; but also, no…

First off, there’s nothing wrong with turning your home into a new commercial enterprise; like a shop or a restaurant.

However, there’s no way to directly ‘convert’ a standard residential mortgage into a commercial mortgage; nor is there a way to directly change a residential buy-to-let mortgage into a commercial buy-to-let mortgage.

But there is a way to switch; you’ll just need to exit the original residential mortgage and remortgage onto a commercial mortgage product as a replacement.

Once you’ve secured the new mortgage, the borrowed funds can often be used to repay the old mortgage.

Still, there are a few hoops you’ll need to jump through…

Securing permission

On the property side of things, you’ll likely need to apply for change of use, planning permission and building regulations approval from your local council and building control authority.

Commercial properties sit in a different ‘use class’ than residential properties, and they’re generally subject to more stringent regulations on safety, access and energy use than residential homes. 

In cases where planning approval is not required, you’ll still need to apply for prior approval alongside your building regs and change of use applications. 

Prior approval is essentially a simple check to confirm your project doesn’t need full planning permission and otherwise conforms to the requirements of the new use class.

Make sure you factor in the costs of planning and regulations applications when planning your mortgage switch. It’s highly recommended to seek assistance from professionals in the field, as a rejected application could make a serious dent in your finances as well as your plans.

And keep in mind, certain types of businesses (such as manufacturing facilities, for example) will be subject to more regulations than others.

Getting a commercial mortgage

Like with any other type of mortgage, your commercial mortgage lender will want assurance that you’ll be able to afford the repayments.

Unlike a traditional home mortgage, though, the lender will be less interested in your personal finances – and more interested in how much the new commercial business will make.

That means you’ll need a solid business plan, with realistic profit forecasts that cover anywhere from 125% to 150% of your monthly mortgage payments (depending on the lender’s rental cover requirements.

That said, your own finances can also have an impact on your chances of securing a commercial mortgage. Personal debts and/or a poor credit score might be a concern for them, while having other successful businesses and/or assets to use as collateral will obviously be a boon.

You’ll also likely need a sizeable deposit of at least 25%; although if you’ve already built equity in your property through your old residential mortgage, you can release that equity to cover the new commercial mortgage deposit.

Can you rent out your home with a traditional home mortgage?

What if you simply want to rent out your current home to tenants? 

Well, it’s complicated.

If you simply want to rent out the spare room to a lodger, you can often do so without changing from a home mortgage product; you’ll just need the lender’s permission first.

What if you want to rent out your home for a few months? Sometimes you might find yourself in a position where you need to move out temporarily, and moving in tenants is a convenient way – or perhaps even the only way – to keep up with your mortgage repayments.

In this case, some lenders will provide temporary ‘consent to let’ if you ask them nicely; enabling you to let your home out to tenants for up to 24 months.

But you won’t be able to stay in the property at any point during the letting period; and once it’s up, you’ll need to move back in.

Can you turn a home mortgage into a residential buy-to-let mortgage?

Perhaps you’ve made the decision to move home, but you’d rather keep hold of your old home and make some money off it at the same time by renting it out long-term.

It goes without saying that a traditional home mortgage won’t let you do this; but just as you can remortgage from a home mortgage to a commercial mortgage, you can do the same with a home mortgage to a buy-to-let mortgage.

Again, you’ll need to convince the new lender that the property will make enough money to cover the rent, and you’ll likely need to provide a higher deposit. 

Speak to a specialist mortgage broker

As you can see, converting a home property into a commercial or buy-to-let property can be a challenging ordeal.

It’s always best to seek advice from a specialist mortgage broker, as they’ll have the skills and knowledge to navigate the confusing world of lender criteria, and find you the most compatible and affordable deals to match your plans.

SPV Mortgages can do just that; with an expert team of brokers sharing more than a decade of experience in the mortgage lending field. Get in touch to discuss your commercial mortgage requirements today.