Essential Advice on Converting Commercial Property into Residential

While many buyers are looking for a residential property to purchase and live in, others are willing to look beyond the obvious. This may include viewing commercial properties, with a view to converting them in to residential use.

With many businesses closing down throughout the country, vacant shops and other commercial premises are becoming a common sight. It would make sense that some of those properties might be converted into homes, especially since properties within that sector are in high demand. According to recent statistics, the Local Data Company (LDC) noted a rise of 18.8% in retail outlet redevelopments taking place to the end of 2018 compared with the previous year. Many of those were redeveloped for residential use.

There is clearly a market for converting such properties and making use of them in another way. However, if you are thinking along these lines, it makes sense to find out as much as you can before pressing ahead. Â It depends on the individual property.

What permission do I need?

It is likely you can go ahead with such a conversion, but you may require planning permission first. In some cases, you may find commercial properties already have the required permissions in place. However, it is always wise to check and apply if need be. Never risk going ahead without permission as this could lead to all kinds of problems. In some instances, Permitted Development Rights (PDR) can allow you to avoid the need to apply for full planning permission. There are four classes in which building use falls into, from Class A through to Class D.

Each category will include several sub-classes. Some changes will fall under PDRs while others will not. It is important to recognise you would still be required to get approval for the change from your local authority prior to going ahead, even if planning permission isn’t needed in your situation. It will depend on how complicated the change is. Some applications may be processed in a few weeks, perhaps up to eight weeks from start to finish.

However, if your application is complicated, you should be prepared for it to take longer than this. A property can be of mixed use, yes. The best example would be a building with a shop on the ground floor and a flat above it. A pub might also have residential accommodation above it. If you are thinking of buying such a property, it is important to consider whether you could convert the commercial portion into residential. You would need to look at change of use and whether planning permission would be required. Other examples of this are ‘Live/Work’ units, which are homes that allow the right for the owner to work from home and that also have the necessary planning approval.

Lenders will consider these properties, subject to the percentage of residential use compared to work space. This type of home is usually for a specific profession, such as an Architect or Consultant, rather than someone trying move their Engineering Business into their home. Not usually, but it does depend on the individual property. If you looked at average figures for commercial sales compared to residential sales, you would see that the former is almost certainly costlier. However, a commercial property could be anything from a single unit to a large building containing multiple units. That means the average price is far less accurate to go by than the average price for a residential property. If you want to compare, you are better off looking at typical property prices within both the commercial and residential sectors for the specific area you wish to buy in.

This will give you a far more accurate idea of how much a typical property might cost. You should also consider whether the commercial properties you are looking at have planning permission in place for the conversion to take place. If not, you are looking at a much bigger challenge, one that may reach far beyond just cost. As such, there are various factors which could come into play in these scenarios. The easiest way to compare the prices is to work out the cost per square metre. On a like-for-like basis, you may find that this calculation makes the commercial property cheaper, however you would need to factor in conversion costs and planning costs.

By including these costs, it may make the difference in pricing a little bit closer. In theory, yes, but not unless it was changed from a commercial property to a residential one. A commercial property is designed and recognised as just that – a property intended for commercial use rather than private use. If you decided to purchase such a property to live in and you did not change its use to facilitate this, you could run into problems if anyone found out. It would also create issues with insurance, as you would unlawfully be using the property for personal rather than business use. If you wish to use a commercial property as a residence, it should be changed from one purpose to the other.

A case study: Craig

The following is a real-life case study: Craig got in touch with us as he wanted to obtain a residential mortgage to help him purchase an existing hairdressing salon, which he could then convert into his residential dwelling. Planning permission was already in place for the conversion which made the project much easier to navigate.

Craig was a builder, so he was able to complete all the necessary refurbishments himself. He and his wife required a mortgage which would enable them to complete the deal. The purchase price for the property was £150,000 and Craig wanted to obtain a residential mortgage for £120,000. He already had funds in place to cover the refurbishments that would be required. Since Craig was a self-employed builder, his income alone was insufficient for meeting the criteria put forward by various lenders. This led us to include Craig’s wife’s income on the mortgage enquiry too.

As an employed person, her income, together with her husband’s met all lending criteria in this situation. We provided advice to cover the process in four steps. These are indicated below, along with the outcome in this case study. No residential mortgage lender would accept the property for a mortgage in its current state as a hairdressing salon.

Therefore, commercial finance would be the appropriate type of finance to apply for to begin with. Residential lenders would only consider the property to lend against, once the conversion was complete. We provided help and advice to assist Craig in arranging the commercial finance. Once this was complete, Craig could begin the refurbishment project. Many commercial lenders require a minimum of 25% as a deposit, and Craig could increase his deposit to meet this requirement. He would do this by dipping into savings and by using equity from a property he and his wife already owned as an investment. The refurbishment could be completed then Craig and his wife would need to be registered as owners of the property for six months. This is the minimum period required before residential mortgage lenders will consider providing a suitable mortgage. The property could then be remortgaged and switched from a commercial mortgage to a residential mortgage as Craig had first wanted.

This would mean Craig could enjoy lower interest rates. He could also release some capital from the current value of the property. Assuming the value of the property had increased over that period, releasing this capital would help replenish the savings used to pay for the conversion work. Craig is now discussing the situation with a recommended commercial broker. He wishes to make an offer on the salon. Once the agreement in principle is received for the commercial loan, we will provide an agreement in principle for the residential part of the process. This means both Craig and the commercial lender will have an exit route from that part of the process.

This type of finance will be for the short term only, so the lender will want to know when and how the loan will be repaid. From Craig’s point of view, the exit route to the residential loan is just as important. Rates for commercial loans are always higher and changing to a residential loan will provide him and his wife with a far more affordable option. Hopefully you can now appreciate that finding a mortgage for a commercial property, which you would like to change into a home for you and your family, is not as simple as looking for a regular residential mortgage.

Get expert advice

This means it is even more important to seek expert advice from an impartial mortgage broker with experience in handling both commercial and residential mortgages. As seen in the above case study, having a plan to take you from start to finish – from purchasing a commercial property, to finally transforming it into a residential property to live in is absolutely vital. Please get in touch with us today at The Mortgage Broker Limited, to find out how we can assist you. We provide expert advice you can rely on, using our experience and contacts in the business to aid you in finding the best deal. Contact Us

Or, call us FREE on 08000 320 316.

Published on 11 March 2012

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