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Doing your homework

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  • 07/10/2002
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Working from home is becoming increasingly popular, but how easy is it to get a mortgage when your office forms part of your home?

There are a growing number of borrowers who rarely have to endure traffic jams, delayed trains or a packed Underground. They work standard hours, and often much longer, yet their journey to work takes minutes rather than hours.

Why? Because for them, their home is also their place of work ‘ or it may be attached to it anyway. An increasing number of individuals now have homes which are either attached to their place of work, or are next to or above someone else’s place of work. The obvious examples are flats above shops, houses with surgeries attached, or homes which incorporate a studio or office.

As a mortgage broker, there are a number of issues to consider when arranging mortgages for such properties, that may not arise when dealing with cases from ‘standard’ clients, but the good news is the issues are (usually) easily overcome.

In most of these cases, the most common cause of concern among lenders comes from issues relating to homes above or attached to a commercial property, such as a flat above a shop. In this instance, the shop may not be owned by the purchaser, who may simply be interested in purchasing the flat.

From a lender’s perspective, these loan applications are treated as straightforward residential mortgages. So the fact the property adjoins a business does not class them as semi-commercial loans. And the main issue from a lender’s perspective is just the quality of security offered.

Check points

Before advising on this type of mortgage application, there are one or two points which should be taken into consideration. The first is how easy it will be to sell the property in the future.

Owning a flat above a bookshop or optician should not ordinarily present any issues at all, but flats above a take-away, a restaurant or a public house can prove more problematic. In fact, many lenders will not provide a mortgage for a flat located above these types of premises, although it should be stressed they may be quite happy to fund flats above some other types of shops. It is also worth checking to see if there are any plans to change the use of the commercial property in future. A change of use may make a highly desirable flat almost un-sellable.

Another issue to be aware of is the access to the property, which should also be carefully checked, as shared access can cause problems. The borrower also needs to identify who is responsible for repairs and maintenance of the overall property. A damaged or leaky roof could affect both the flat and the shop below, so it is important to know who is ultimately responsible.

Finally, the length of the remaining lease is a key issue. Often lenders’ policy is that the lease should be at least 30 years longer than the mortgage term.

However, for many people their objective is not simply buying a flat which is located above a shop. They also want to buy the shop and are looking for a mortgage on the combined entity. These types of mortgages are classed as semi-commercial. Common examples of circumstances that may be classed as semi-commercial are doctors or vets with surgeries attached to their houses, post offices, bed and breakfast properties, boarding kennels and houses with office accommodation included.

The first factor any lender will look at, and this is the same for a standard residential property, is the condition and valuation of the property.

In many instances, properties that incorporate commercial premises can be of an unusual type or construction. For example, old farmhouses with outbuildings can make perfect conversions into homes with attached offices or studios, but they must represent acceptable security for the lender.

A critical aspect of the property is its location. Location has a fundamental impact on the value of the security being offered and, unfortunately, not all business premises are found in the most desirable locations. For example, a number of lenders active in this sector would not lend on a shop with a flat which is located in the middle of a shopping precinct.

The second factor is that flats above retail units, post offices and so forth are viewed as property for commercial gain ‘ not residential ‘ and are assessed against commercial lending criteria. At the moment, the Financial Services Authority (FSA) is not proposing that commercial lending will fall under its regulatory remit. Therefore, lenders will be interested in the soundness of the business itself. For example, someone running a bed and breakfast establishment or a post office with plenty of experience in that field is fine, but someone wanting to run a gift shop simply because ‘they have always dreamed about doing it’ would not be viewed favourably.

Ability to pay

The biggest risk to lenders is that the business fails because it would obviously impact on the borrowers ability to repay the loan, and they will want to ensure the business is viable. To state the obvious, the home and the business are tied up in one loan ‘ one title ‘ and lenders have to ensure both bricks and mortar and the business proposition are sound risks.

As a result, the lender will inevitably want to see the applicants proposed income projections and have sight of proof of income to ensure the borrower can support the level of debt they are committing to. Self-certification loans can be useful in these circumstances, as proving income can frequently be more difficult than it first appears for such individuals.

An important issue for the broker to constantly keep in mind, is that the lender is granting a loan based on the value of bricks and mortar.

The lender is not providing commercial finance to help inject cash into the business or provide working capital. That is the domain of specialist commercial lenders. The total worth of the business, therefore, is not of interest to a lender who is underwriting a semi-commercial loan application because the business’s value will include items such as stock, goodwill and other assets. The lender is only interested in the value of the property.

Risk assessment

The combination of an unusual property, self-employed individual and semi-commercial use is, regrettably, often more than enough to scare away the most enthusiastic lender. The problem is frequently not to do with the nature of the risk, but quite simply the lender not having the expertise to assess the risk and make an appropriate lending decision.

For this reason it is often better to seek out lenders who specialise in niche mortgage lending, as they will usually assess each case individually and make a lending decision based on the applicant’s own merits, rather than trying to apply blanket lending criteria. Recently, such lenders have granted loans on a number of unusual proposals, including a house with an airstrip attached, as well as less unusual semi-commercial propositions such as an art gallery.

The reason specialist lenders are willing and able to lend on such proposals is not because their underwriting standards are different to more mainstream lenders, but because they are willing to consider each and every application on its own merits and they have built up expertise in assessing such applications. This is a key issue when trying to place a mortgage for semi-commercial properties and it makes sense to identify those lenders who still underwrite in this way.

Semi-commercial properties will undoubtedly scare off a number of brokers, but they shouldn’t. With a bit of background knowledge and an understanding of which lenders are best positioned to assess such applications, there is no reason why a broker should shy away from such deals.As ever in non-standard mortgages the answer lies in doing your home work.

Chris Cummings is marketing director of Sunbank

sales points

Condition and location are very important to lenders as they must represent acceptable security.

Flats attached to retail units are assessed on commercial lending criteria.

With semi-commercial loans, lenders are not providing working capital and are only interested in the value of the property.

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