So, how do you convert a commercial property into a residential property and structure the finance accordingly? The following is a real life case study*.

Craig contacted us in March 2012 and wanted a residential mortgage to convert an existing hairdressers shop into his residential dwelling. The shop already has planning permission for the conversion and all that Craig and his wife required was a mortgage structure to enable then to facilitate this deal. Craig is a builder so he would look to complete the refurbishment work himself.

The figures

Craig was looking for a £120,000 residential mortgage on a £150,000 purchase price and has his own funds to complete the necessary refurbishment work that are required. Income for Craig as a self employed builder is insufficient so we have had to include his wife on the enquiry so we could take her employed income into account to fit lenders criteria.

Our advice

Step 1

We advised that a residential mortgage would not be available in the first instance and that the first stage of finance should be commercial finance – No residential mortgage lender would accept the property in its current commercial state and would only consider lending against it once the conversion was completed.

Step 2

Once the commercial finance was arranged (we helped and advised on the commercial finance) Craig could start the refurbishment work. It was suggested that he may require a slightly larger deposit than the 20% he had and that the commercial lender may require a deposit in excess of 25% – Craig had the extra deposit if required from his savings and in equity from an existing investment property that he and his wife already owned.

Step 3

Once the refurbishment was completed and ownership of the property had been registered in Craig and his wife’s name for a period of at least 6 months (the majority of residential mortgage lenders current lending criteria dictates that properties must be owned for at least 6 months) we would be able to remortgage the property onto a residential mortgage. Thus enabling Craig to take advantage of lower interest rates and to allow him to release some additional capital from the property, assuming the value had increased, which would replenish the savings he had used to pay for the conversion work.

Step 4

(current situation) Craig is currently in discussion with our commercial broker with a view to making an offer on the hairdressing salon. Once the commercial ‘agreement in principle’ is granted we will look to provide an ‘agreement in principle’ for the residential part of the structure so Craig and the commercial lender can have an exit route – For the commercial lender this is important as this type of finance will be short term and the lender will want to know how and when they will be repaid. For Craig the exit route is important as without it he will end up maintaining and paying for the more expensive commercial finance which will prove to be uneconomical over the long term.

* Case study reference TMBL070312WORTH.