Holiday Let Flat Above a Shop: How to Get a Mortgage

Why Some Lenders Are Cautious

A lender is not really judging the flat.

It is judging how easily it could sell the flat if the loan went wrong, and a shop underneath makes that harder to predict.

The concerns that come up again and again are:

• Noise, smells and late hours. A bakery starting at 5am or a café frying until close can put off guests and future buyers.
• Fire risk. Commercial kitchens and storage below a flat raise the fire risk and can affect insurance.
• The shop changing hands. Today’s gift shop could become a takeaway next year. The lender has no control over that, but it affects the flat’s value.
• Access and shared parts. Many flats are reached through a side door, a shared passage or, in the worst cases, through the shop itself.
• A smaller pool of buyers. Because so many lenders decline these flats, fewer buyers can get a mortgage on them. That makes resale slower and valuations more cautious.
• Building condition. High street buildings in old harbour towns are often several hundred years old, sometimes listed, and the upkeep of the roof and walls is shared with whoever owns the shop.

None of these make the flat a bad investment, and none of them rule out a mortgage. Mainstream lenders tend to avoid these questions. Specialist lenders are set up to answer them.

The Shop Underneath Matters More Than You Think

What trades below the flat is the biggest factor in which lender will suit it.

Lenders often work from the planning use class of the shop, so it helps to know it before you offer.

Since 2020, shops, offices, cafés and restaurants have mostly fallen under one planning class, Class E. Hot food takeaways, pubs and bars sit outside it as “sui generis” uses, which simply means a class of their own.

The shop also changes over time. A lender may look at what the planning allows, not just today’s tenant, because a Class E gift shop can become a Class E café without needing new planning permission.

A flat above a quiet retail shop gives you the widest choice, including mainstream lenders. A flat above a restaurant, takeaway or pub will usually go to a specialist lender. That normally means a higher rate, but in most cases the mortgage can still be arranged.

Title and Tenure: The Detail That Decides the Route

This guide is about a flat on its own title, separate from the shop.

That matters, because it means you are buying the flat alone and can finance it with a holiday let mortgage rather than a commercial one. But how that title is held decides which lenders will look at it.

Leasehold flat

The flat is held on a long lease and someone else, often the shop owner, owns the freehold. This is the arrangement most lenders prefer. Expect lenders to want at least 85 years left on the lease when the mortgage starts, and some want more.

Freehold flat (often a “flying freehold”)

The flat is owned outright, but it sits over a shop owned by someone else.

This is common in older West Country towns. Many mainstream lenders will not accept a freehold flat, because there is no lease setting out who repairs the roof, the walls and the shared parts, and how that can be enforced.

A flying freehold, where part of a property overhangs land owned by someone else, adds to that concern.

Specialist lenders will often consider freehold and flying freehold flats, looking at the repair and access arrangements case by case.

Leasehold flat with a share of the freehold

You own the flat on a lease and also own all or part of the freehold of the building. Some lenders accept this, provided they can take a charge over both.

Check the lease allows holiday lets

This catches out a lot of buyers.

Many leases above shops ban short-term lets, business use or “anything that causes a nuisance”. If the lease does not allow holiday letting, most holiday let lenders will decline, however good the rest of the case is. It can sometimes be put right with a deed of variation agreed with the freeholder. Ask your solicitor to check this early, before you spend money on a survey.

Other lease points lenders look at include:

• the ground rent, and whether it doubles or is linked to the property’s value
• service charges and who pays for repairs to the roof and outside walls
• buildings insurance, and whether the commercial use below is declared
• rights of access through any shared passage, yard or stairway

The Holiday Let Side of the Case

Once the flat itself passes, the lender looks at it as a holiday let. These checks apply to any holiday let, but some carry extra weight for a high street flat.

• Letting income. Most holiday let lenders base the loan on a projection of the gross income from a holiday letting agent, usually split into high, mid and low season weekly rates. The rent has to cover the mortgage interest by a set margin at a stressed rate. A flat that sleeps two will produce less than a cottage that sleeps six, which can cap the loan.
• Minimum value. Some lenders set a higher minimum value for property above or next to commercial premises, often around £150,000. Small one-bedroom flats in cheaper towns can fall below it.
• Planning. Check the flat has no planning condition preventing holiday use, and whether the local council has any controls on second homes or short lets in that area.
• Personal use. Most lenders allow some owner and family use, often up to around 90 days a year, but the flat must be a genuine holiday let.
• Energy rating. Most lenders need an EPC of E or better, and some refer an E rating. Older flats above shops often score poorly.
• The building. Listed buildings, non-standard construction and flats with no lift above the third floor all narrow the choice of lender.
• Who is borrowing. Some holiday let lenders only lend to individuals, so buying through a limited company rules them out. Others cap the number of properties you can own.

So Who Will Lend?

There are two routes, and which one fits depends on how “clean” the case is.

Mainstream holiday let lenders

A small number of building societies and banks that offer holiday let mortgages will accept a flat above commercial premises. Their terms tend to be the sharpest, but their criteria are strict. A typical case that fits is a long leasehold flat, with a lease that allows holiday letting, above a quiet Class E shop, comfortably above the lender’s minimum value, bought in personal names.

Specialist lenders

Where the case does not tick every box, a specialist lender that underwrites each case by hand is usually the answer. These lenders look at the property and the borrower as a whole rather than running them through a fixed checklist.

That opens the door to cases most lenders decline, such as:

• freehold or flying freehold flats
• flats above cafés, restaurants, takeaways and pubs
• leases that need extending, or with unusual terms
• purchases through a limited company
• older or listed buildings, or flats needing some work

The trade-off is cost. Specialist lending is usually priced higher than mainstream holiday let lending, and the specialist valuation can cost more. For many buyers that is still the better deal, because the alternative is no mortgage at all.

Once the flat is trading and the income is proven, it may also be possible to move to a mainstream lender later, if the property then meets their criteria.

How Drake finds the right lender

We look at the title, the lease, the shop below and the projected income before anything goes to a lender.

That tells us early which route fits, so you are not paying for a valuation with a lender that was never going to say yes. Where a mainstream lender will not consider the flat, we approach the specialist lenders that will.

We also work alongside a number of specialist master brokers. That gives us access to lenders and products beyond our own panel, so we can cast the net even wider for the more unusual cases.

Before You Make an Offer: A Quick Checklist

Gather these early. They are the questions a lender will ask, and the answers decide which route your case takes.

1. What is the shop underneath, and what are its opening hours?
2. Is the flat on its own title, and is it leasehold or freehold?
3. If leasehold, how many years are left, and what are the ground rent and service charges?
4. Does the lease allow holiday or short-term letting?
5. How is the flat reached: its own street door, a shared passage, or through the shop?
6. Who is responsible for the roof, the outside walls and the buildings insurance?
7. Is the building listed, and roughly how old is it?
8. What is the EPC rating?
9. Are there any planning conditions on holiday use?
10. What does a local holiday letting agent project the flat will earn across the season?

If you do not know some of the answers yet, that is fine. Send us the listing and we can tell you which ones matter most for your case.