Mixed-use property loans

If you're buying a home with a shopfront attached, which can be used both as a residence and a business, you're buying a mixed-use property.

If you want to buy a mixed-use property it's often tricky to work out what kind of loan you qualify for. It ultimately depends on your lender's own rules and the specific details of the property you're buying. And it's an important distinction: A commercial loan is more expensive than a residential home loan.

Residential or commercial: How does your lender classify your property?

Many lenders consider mixed-use properties to be commercial properties if the property is zoned for commercial use. This means you need a commercial loan. But it's entirely possible that a lender will offer you a residential home loan. When trying to get a loan approved, it's a good idea to speak to multiple lenders before submitting an application.

Ask your lender how they classify your property, and make sure you have the address handy.

Different mixed-use properties

Mixed-use properties vary quite a lot. Some are much closer to a pure residence, while others may essentially be business premises with a small living area. Here are some examples:

• A home with a shopfront or workshop attached.
• A split-level property with a residence upstairs and the entire downstairs zoned for commercial use.
• A larger building with residential apartments upstairs and shops or offices on the ground floor.

As a general rule, the greater the proportion of the property is residential, the easier it is to qualify for finance. This also affects how much you're able to borrow relative to your deposit size (your loan-to-value ratio). If the property is primarily a commercial space you will need a larger deposit of 20% or even 30%.

Commercial loans are more expensive than home loans

Lenders tend to view commercial loans as being higher in risk, which means these loans have higher rates and fees, plus other restrictions. Commercial loans usually:

• Have higher interest rates than residential loans
• Have lower LVRs compared to residential loans
• Have higher application fees (sometimes charged as a percentage of the loan amount)
• Have shorter loan terms than residential loan terms (some lenders will give you 30-year terms but most will limit you to much less than that)

Why are commercial loans higher risk?

The demand for homes is higher than for commercial properties. It's much easier to find a buyer or tenant for a residence. This matters to your lender because the property you're buying acts as the lender's security. In other words, if you can't repay the loan, the lender sells the property to recover the debt.

It's harder to sell commercial properties. And this is especially true of mixed-use properties that combine a home and commercial space, which typically suit only a narrow market segment.

How much can you borrow for a mixed-use property?

With a normal residential home loan, many lenders will lend you 80% or even up to 95% of your property's value. Every lender has its own criteria (and it may even vary by postcode), but the more commercial the property, the less you can borrow.

If the property is primarily commercial in use you may only be able to borrow around 80% or even 70% of the property's value. This means you might need a 30% deposit.

How to boost your chances of loan approval

There are a few simple steps you can take to ensure that you find the right loan to purchase your mixed-use property.

• Shop around. Just as you would with any other type of loan, shopping around for a better deal can save you a whole lot of money. You might be surprised to learn just how much interest rates, loan-to-value ratios and other loan features can differ from one lender to the next, so don’t just settle for the first mixed-use property loan you come across.
• Ask a mortgage broker. Mortgage brokers are experts when it comes to home loans. After assessing your financial situation and the financing you need, they can present you with a selection of loans from their panel of lenders that match your requirements.
• Location matters. When it comes to commercial lending, you'll have much more borrowing power if you're buying a property in a busy, built-up area. Properties in large population centres and bustling retail districts have a greater number of potential customers and therefore a greater chance of turning a profit.
• Prepare a business plan. There are several factors lenders need to consider when offering financing on a commercial property. If you’re planning on operating a business out of the property you buy, a little bit of prep before you meet with lenders can go a long way. Develop a comprehensive business plan and strategy that you will be able to present to lenders when you approach them for a loan. A well-thought-out and sensible business plan will increase your borrowing capacity.
• An established tenancy can help. If you're renting out part of the premises and already have tenants, the lender will view your loan application more favourably. If you can show a history of rent payments being made on time, make sure to present this evidence when you apply.