Switching part of mortgaged property into cafe - issue with lender?

LeicesterTerrace

Hello

We currently own a chapel house and an adjoining vestry. The vestry is a separate entrance but is on the same deeds as our home and forms part of the overall 'house'. I think it got through the 'annex' criteria when we came to get a mortgage on it, as a lot of lenders were a little nervous about this.

We are however considering looking at a change of use for this section of the property (which is larger than the house) and making into a community cafe, which we will run as self-employed owners.

We have already submitted an application with the local council for a change of use and it is looking quite probable we will get it. That said, we are wondering how it works with the lender. We will, of course, be altering a section of the property into a business and, the real concern is if we came to remortgqge in 18 months or so, how this would then be viewed. I have tried looking online however I cant seem to find much on existing owned properties that owners are looking to change the use of a portion of it.

I thought i'd ask this forum first before picking up the phone to a lender.

Thanks, CW

davidmcn

Broadly speaking, anything which includes business premises won't qualify for a standard residential mortgage. You might be able to get a commercial mortgage to cover the whole thing, or it might be simpler to split the title if you want to keep a residential mortgage over the house (and for that you'd need consent from the lender to reassess the value of what you'll have left, as well as figuring out any legal issues of separating the properties).

LeicesterTerrace

OK thank you. As a matter of interest, say we converted the vestry into a cafe today and continued with the residential mortgage for another year until the 2nd year fixed term expired....what is the worst that could happen here? Not for a minute saying we'd do this, but just wanted to know how this would be viewed.

Thrugelmir

You'd be in breach of the terms of your mortgage. Not a road you should travel down. A commercial loan is the only way to go. Though in the current climate perhaps not the easiest thing to obtain. 

davidmcn

LeicesterTerrace said:

OK thank you. As a matter of interest, say we converted the vestry into a cafe today and continued with the residential mortgage for another year until the 2nd year fixed term expired....what is the worst that could happen here? Not for a minute saying we'd do this, but just wanted to know how this would be viewed.

Lender could tell you to either (a) stop the offending use or (b) repay the loan immediately. Failing which they could repossess.

getmore4less

If you did not tell them then  at end of current fix just did a product switch they may never know.

[Deleted User]

chances of the lender finding out if you didnt tell them is probably quite low.   Howver, unless you deal with it now you may find it near impossible to sell your house in the future

LeicesterTerrace

Thank you for your assistance all. Much appreciated. I'm just working out the boundaries... The above sounds similar to when I've heard people letting out their property when on a residential mortgage and then convert it when they come to remortgage.

If I may be so cheeky to set out the scenario, as were trying to understand how we could structure it:
1. we purchased a chapel house and vestry in October last year (2019) for £228k and took out a 90 LTV mortgage on a 2 year fixed rate. We live on the outskirts of a historic medieval walled town, so is very popular area and so values are high around here
2. We won it on a sealed bid which we felt was low at the time and although we have no idea of the property value now, we have added significant value relatively speaking. The £228k alone would be sufficient for a house the size of this one and so the vestry is in essence a bonus. Put another easy, if the house was valued alone, this would at least be worth the £228k we paid for the entire plot.
3. Assuming a change of use is approved, we are looking at crowdfunding/local investment also, as a Vestry 'Art Cafe' would be a great addition to the area (we are in Snowdonia).

Based on the above points, how could this be structured? Perhaps convert use, keep the mortgage until the fixed period is up and then at the point we come to remortgage again, split the titles then? We feel very confident that the property alone would be worth at least the purchase price. 

Am sure there will be questions, but all of your assistance above has been so helpful, I hope you don't mind me adding a little more meat to bone as to what we are trying to achieve.

Thanks

Thrugelmir

Sounds as if the heart has ruled the head.......... 

LeicesterTerrace

If that's the case, then please share why you think that. Not a terribly useful comment on its own!

Brock_and_Roll

The basic idea seems fine - I might have bought your place myself, split the title then sold off separately. The difference is I would have done it for cash. You are on a 90% mortgage - which post-covid are hard to get even for the most simple cases.
As for the crowd-funding etc, I have no idea how this has or will be affected as part of any economic downturn. Bank finance would of of course require you to have signifcant skin in the game.