Flats above commercial premises next buy to let growth area

The next buy to let growth area is likely to be residential property above commercial premises, such as a flat above a shop, which is now possible to fund through a new range of specialist buy to let mortgages products according to Mortgages for Business, independent buy to let brokers.

Flats and other residential property situated above commercial premises have traditionally proved difficult to finance. Many buy to let lenders have, until now, put complex lending criteria in place to avoid this property type altogether.

To purchase such property, an investor would have had to resort to a commercial mortgage. Commercial mortgage products are priced individually, making them often more expensive than a buy to let mortgage and far less flexible, leaving this potentially valuable asset class to the professional investor

When sourcing funding to purchase a flat above a commercial property, the type of business in the commercial premises can further compound the problem.

David Whittaker, managing director of Mortgages for Business, explains: “If the property is above a food related premises, such as a take-away or restaurant, most lenders steer clear, making these flats a “no-go” area for all but the most persistent investor. This is due to a number of factors such as smell, noise and unsocial working hours, all of which affect the future resale potential of the property and the property’s letting potential. Other business activities that may concern lenders will include businesses such as laundrettes and dry cleaners for similar reasons.”

Keystone Mortgages, who work in partnership with Mortgages for Business, will now fund flats above commercial property, even if the business is a food outlet, for those wishing to invest in this property class.

Keystone Mortgages has recognised that property investors need a more bespoke mortgage underwriting criteria and service standards. In doing so Keystone seeks to differentiate its offering from other lenders. As mainstream lenders have sought to automate their operations to meet demand and improve margins, Keystone looks at funding propositions on a case-by-case fashion, looking at each application on its own merits.

David Whittaker continues. “As interest rates have risen, buy to let rent margins against mortgage payments have narrowed. To beat tougher rental yields, landlords could look at traditionally higher yielding rental property types and flats over commercial premises falls into this category.

We expect a significant demand for this product and this class of property increases in popularity further. This product is particularly welcome and comes at a good time, particularly given market conditions.”

When considering purchasing residential property situated over commercial premises, buy to let investors should be aware the flat should be leasehold. Freehold flats over commercial premises will be nigh on impossible to fund using a buy to let mortgages. This relates to the fact the freeholder of the flat is reliant on the freeholder of the commercial premises for the upkeep of the whole building. If the freeholder of the commercial premises below fails to maintain the building properly this can affect the flat upstairs.