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Which property conversion loans are available for converting commercial to residential?

semi commercial property

This week I was asked by a client “Can I convert a commercial property into a residential property and if so, which  financing options are available?”

Before looking at the financing options, it is worth considering whether the property can be converted from commercial to residential in the first place.

While commercial to residential conversions fall under the new permitted development rights, there are certain aspects to consider.

Following the changes to the permitted development rights in 2021, a new class of commercial property was created – Class MA.

Class MA allows buildings within the Use Class E (Commercial, Business & Service) to be converted into dwellings.

While these properties potentially fall under the permitted development rights, there are certain criteria points that need to be met.

  • While full planning may not be required, an application for prior approval must be made to the local council outlining the plans for the conversion.
  • The property must have been vacant for three months prior to the application.
  • The property must have been in commercial use for at least 2 years.
  • The conversion must not change the use of more than 1,500 square meters of floor space.

 

What are my financing options for the purchase?

As the property is currently commercial, it will need to be purchased using a commercial bridging loan / short-term development finance.

This will allow you to acquire the property and apply to the local authority to obtain the required prior approval.

What are my financing options for the works?

Once prior approval is in place, you will then be able to begin the conversion of the property.

There are several funding methods available that can be used to fund the works. There are also lenders that offer a works-funded loan.

The below example case outlines the potential funding options available: (Mobile users – turn your phone landscape to view the table below).

Funding options for a Commercial to Residential conversion

Purchase price: £250,000

Cost of work: £100,000

End value: £600,000

 

Deposit Additional Security Available? Works Funded Total Loan Amount

Option 1
Use of own funds for the cost of works

£62,500
(25%) + Legal & acquisition costs
No £0
Works are self-funded using the applicant’s own cash reserves
£187,500
(75% loan to value)
Option 2
Use of equity in another property
£0
(0%) + Legal & acquisition costs
Yes
If another property has sufficient equity, then additional security can be taken.
Up to 100% of the purchase price and works
£100,000

£350,000
(140% loan to value)

Option 3
Works funded facility
£62,500
(25%) + Legal & acquisition costs
No £100,000
Stage drawdowns paid in arrears

£287,000 + interest rolled up
(75% LTV for purchase)

incl £100,000 cost of works
(Subject 65% LTGDV)

What are my financing options for when the conversion is completed?

Once the works are fully completed and the property is fully residential, the property can be refinanced onto a buy-to-let mortgage.

The benefit of this is not only are you able to retain the asset, but you can then refinance onto a cheaper fixed buy-to-let product.

In addition to this, you can also take advantage of the potential increase in value after the conversion by capital raising and releasing additional funds.

How can Advocate Finance help?

Advocate Finance are experts in arranging funding solutions for property investors and developers. Thanks to our award-winning knowledge and profound relationship with our 160 lending partners, we are able to assist you in finding the correct funding solution for your commercial to residential conversions.

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Advocate Finance

enquiries@advocatefinance.co.uk | 01206 544333
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