Do you need a home loan to buy a mixed-use property? Shop around to see which lender can offer you a mortgage that satisfies your needs.
A mixed-use property is a property that has been zoned for more than one purpose, with the most common example being mixed residential and commercial zoning. In the inner city, such properties often take the form of a business downstairs with an apartment upstairs. In other areas, they may involve a freestanding home with one portion used as a shopfront and the other for family living.
But if you’ve found a mixed-use property that’s perfect for you and you need finance to buy it, what do you do? Will you need a residential home loan, a commercial loan or both?
The topic of borrowing money to buy a mixed-use property can be complex, so you’ll need to examine your situation closely before deciding on the most suitable borrowing approach.
Commercial or residential?
The type of loan you’ll be offered for a mixed-use property varies depending on your situation, the lender and the property in question. While most lenders will classify mixed-use properties as commercial lending because of how the properties are zoned, others may decide to offer you a residential loan. With this in mind, it’s a good idea to speak to a number of lenders to see what type of loan they would be able to offer you and what features the loan would have.
The distinction between a commercial loan and a residential loan is important because the two different loan types attract different terms and conditions. Lenders tend to view commercial loans as being higher in risk, so they tend to attract lower maximum loan-to-value ratios (LVR) and higher interest rates than ordinary residential loans. Commercial loans are typically only available with shorter terms than residential loans, so you may have to repay the money you borrow over 15 years instead of 30.
In most cases, lenders will assess properties that have commercial sections, such as retail, office or manufacturing spaces, as commercial properties. This means they will offer you a commercial loan with a higher interest rate and lower LVR, but it pays to shop around to see what options are available.
How much can I borrow?
How's a commercial loan different to a residential loan?
- They can have higher interest rates than residential loans
- They have lower LVRs compared to residential loans
- They can have higher application fees
- They have shorter loan terms than residential loan terms (e.g 15 years vs 30 years)
The amount you’ll be able to borrow will be affected by a range of factors. First, the lender will take into account the price of the property you wish to purchase and your financial situation when deciding how much you can afford to repay. As always, the larger the deposit, the greater your borrowing power. Each lender will also have its own approach to lending on mixed-use properties, which will be affected by the level of risk it’s willing to accept when offering financing to a borrower.
You should also be aware that the maximum LVR available to you will be influenced by the type of property you are buying. For example, if the property you are buying is a normal house and is appropriately zoned for you to later convert it back to residential use only, you’ll typically be able to borrow up to 90% LVR. If you want to rent out the residence attached to the commercial property, some lenders may offer you an LVR of as high as 80%. Otherwise, the maximum LVR you can access may be 70% or 75%, which will require you to save as large a deposit as you can.
Tips to help you find the right loan
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. Brokers have a duty of care to only match you with a loan that you can afford to repay, so enlisting expert help can save you time, money and stress.
- 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 power.
Other issues to be aware of
- Lending considerations. Lenders will examine a wide range of factors when deciding whether or not to approve your loan including your income, your assets and liabilities, the deposit you’ve saved and your plans for the commercial portion of the property.
- 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 busy retail districts have a greater number of potential customers and therefore a greater chance of turning a profit.
- Being established helps. If you’re starting up a brand-new business in the property you buy, there’s less chance of your loan application being approved than if you are taking over an established business. An established business with a proven history of success will look much more attractive to a lender, so developing a detailed business plan and business strategy is extremely important if you’re planning on starting a new business.
- Established tenants. If you plan to rent out the residential portion of the property and established tenants are already in place, 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.
- Less market appeal. As a general rule, it’s harder to get a loan for a mixed-use property than for a normal residential property. This is because mixed-use properties have less market appeal to potential future buyers and are harder to sell, so lenders often see them as posing more of a risk.
- Insurance. Most lenders require you to take out lenders mortgage insurance on your mixed-use property loan, even if you’re borrowing less than 80% LVR. Remember to factor this extra expense into your calculations when working out how much you can afford to borrow.