To refinance a mixed-use property is to replace the loan on a building with a shop below and a flat above, along with any refurbishment and business loans beside it, with new loans on new terms. This guide sets those loans out in one place, with the effect a new rate, a longer term or different security has on what you repay each month and in total.
Why does a building that is mostly a flat sit on a commercial loan, with a yearly review and a term that runs out? Did the last valuation come in under what you expected, even with both tenants paying? Would you like to redo the flat's kitchen and bathroom? Does every dollar of equity, the share of the building's worth you own outright, seem tied to the shop downstairs? And if you trade from the shop yourself, are the business's loans repaid on dates that never line up with the building's?
A building with a shop at street level and a home upstairs is a property Ardent Capital Group can assist with refinancing, together with the refurbishment and business loans that came with it. Whenever you are ready, we can take you through each loan in turn.
Why a building with a flat upstairs sits on a commercial loan
Your building earns rent in two ways and was bought on one loan. Because part of the building is a shop, the loan on it can be a commercial loan, depending on the lender. A commercial loan can carry a set term, a yearly review and conditions the lender checks, as set out in the loan agreement.
The term is the number of years the lender has agreed to lend for. For a commercial loan, a bank term commonly runs 10 to 15 years in published policy, and a non-bank term 25 to 30. When a term ends, or a review letter asks for updated accounts and leases, the loan comes back up for discussion. That date is a natural point to compare what other lenders would offer for the building.
A few things also change on the building while the loan runs:
- The flat is now let. If the flat was empty or owner-occupied when you bought, it now has a tenancy agreement and a record of rent paid.
- The shop's lease has moved on. The tenant may have renewed, asked for a new lease, or left. Each one can change the rent the building earns.
- The flat or shopfront needs work. A new kitchen, a bathroom, split systems or a rebuilt shopfront all need funds, and the building is the asset those funds can be drawn against.
- Fire safety. In NSW, the owner of a building with essential fire safety measures, such as alarms and exit signs, issues a fire safety statement every year. Upgrade works found in that check need funding too.
Planners in NSW call dwellings above ground-floor shops or other business premises shop top housing, and lenders call it mixed-use property. Either way, the building carries two leases and one loan.
Example: the loans on a shop with a flat above
Side by side, the loans are simpler to weigh against each other. This building and its figures are made up for illustration. The owner trades from the shop through their own business and lets the two-bedroom flat upstairs. The building was bought on a bank loan, and a smaller loan was added later to refurbish the flat.
| Debt | Balance | Assumed rate | Months to go | Repayment |
|---|---|---|---|---|
| The building | $1.1M | 7.5% | 120 | $13,057 |
| The flat's refurbishment | $80k | 8.5% | 48 | $1,972 |
| The shop's fit-out and equipment | $45k | 11% | 30 | $1,723 |
| Total | $1.225M | $16,752 |
$1.1M is still owed on the building at an assumed 7.5%, with 120 months left, and it costs $13,057 a month. The three repayments add up to $16,752. That total falls to $15,029 once the shop's equipment loan ends after month 30, and to $13,057 once the flat's loan ends after month 48.
The business also has a $30k overdraft with $20k drawn, which stays outside every option in the worked example. An overdraft lets the business borrow up to an agreed limit and pay it back as takings arrive. The rates in this example are assumptions picked to make the sums work, and none is a rate any lender is offering.
How a refinance changes the building's loans
When you refinance, the money from a new loan clears one or more existing loans, and the new lender can be your current one or a different one. For a shop with a flat above, three things can change. Each moves this month's repayment and the lifetime cost differently.
- The interest rate. If the property loan keeps its remaining months, a cheaper rate shrinks both the monthly repayment and the interest over the life of the loan. Each lender prices the loan on the security, the two rents and any trading in the shop, and the credit history of every borrower.
- The term. Spreading the same balance over more months lowers each repayment. Because the balance is owed for longer, the total interest rises. A longer term can still suit a building through a lean patch, such as months when the shop sits empty between tenants.
- What secures it. Security is whatever the lender can sell to recover the money if the loan goes unpaid. The building is the main security here. Adding the owner's home, or taking it away, changes what a lender will offer and what secures the debt.
All three loans here are amortising. Each one runs down to nil by the end of the term, unless it ends in a balloon, a lump sum left to the final repayment. From every repayment, the lender first takes that month's interest, and whatever is left reduces the debt. Because interest is worked out on a balance that starts high, the first years go mostly to interest.
Worked example: the first repayment on the building
Splitting one repayment shows where the building's money goes in the first year. Month one on the $1.1M property loan, at an assumed 7.5%, carries $6,875 of interest. Of the $13,057 repayment, $6,182 reduces what is owed. After twelve repayments, roughly $76,800 has been cleared from the property loan.
Refinancing each loan on the building
Each loan on a mixed-use building paid for something different: the building, the flat's refurbishment, or the business in the shop. Each one can be moved, combined or left in place.
The loan on the building
The property loan is the biggest debt, and it is the one with the term and the review attached. A refinance can move it to another lender, change the rate, lengthen the term or release equity.
If the loan has a fixed rate, ending it early can carry a break cost: a fee for ending a fixed rate early. The more rates have fallen since the rate was fixed, the bigger it is. The first number to collect is a written payout figure from your existing lender. That figure is the sum which settles the debt in full on the day the refinance completes.
The loan that refurbished the flat
This loan paid for things that wear out much sooner than the building itself. In this example, it paid for a new kitchen, a bathroom, carpet and split systems.
Some of those items have an effective life: the number of years an asset can be used to produce income, taken from the ATO's determination or worked out by the business. It is a tax figure, not a promise of how long the equipment will run. For residential property operators, the ATO's determination gives mini split systems 10 years, carpet 8 years and dishwashers 8 years. Which figures apply to your flat is your accountant's call.
Folding the $80k loan on the flat into a 25-year property loan lowers its repayment. It also means paying interest on the carpet and split systems for years after they are replaced. Left as its own loan, it is cleared in 48 months, well inside the property loan's term. Either way, the refinance can include funds for the next round of work, with quotes showing what the money is for.
The business's loans, for an owner who trades downstairs
If you trade from the shop, your business carries its own loans alongside the building's: here, a fit-out and equipment loan and an overdraft. The equipment loan is secured by a general security agreement, under which the lender can claim what the business owns, from stock to equipment.
The lender records it on the PPSR, the national register of security interests in personal property. It does not cover land, buildings or fixtures to land. Paying out the old loan removes that record, and whoever lends next registers a fresh one.
Ending the equipment contract before its term can mean an early payout charge. What it comes to is set out in the contract itself, so a written figure from the financier is the place to start. Rolling it into the property loan spreads it over the building's term, which can run years past the equipment.
Where your business pays rent for the shop to you or to the entity that owns the building, a lender reads that rent and the business's trading together.
If you live in the flat
Some owners live upstairs and trade downstairs, which makes the building both a home and a commercial property. When the shop and flat share one title, the loan on the building is also the loan on your home. A refinance of the building then involves the place you live.
How tax applies to a home that is part of a commercial building is a question for your accountant.
Putting the building's loans together
With each loan's options in view, you can weigh keeping the building's loans apart from the business's, or bringing them under one loan, and over how many years.
Worked example: five ways to carry the $1.225M
Each of the four choices changes the rate, the term or how the loans are combined. Against keeping all three loans unchanged, each shows the difference in this month's repayments and in the interest still to pay until every loan is cleared.
| Choice | Paid each month | Monthly change | Interest to come | Interest change |
|---|---|---|---|---|
| Leave all three loans where they are Today | $16,752 | Starting point | $488k | Starting point |
| Reprice the property loan, keeping 120 months | $16,467 | $285 less | $454k | $34k less |
| Move the property loan to a 25-year term | $11,824 | $4,928 less | $1,360k | $872k more |
| One loan on the building for all three debts, 120 months | $14,541 | $2,211 less | $520k | $32k more |
| One loan on the building for all three debts, 25 years | $9,053 | $7,699 less | $1,491k | $1,003k more |
Figures are illustrative and rounded, and each rate is assumed for the sums rather than quoted. Left out: the overdraft, any break cost, the equipment's payout charge, set-up and valuation fees, and future rate movements.
Combining all three loans over 25 years lowers the monthly repayments by $7,699. It also adds $1,003k of interest, because the whole $1.225M is owed for many more months. The flat's carpet and the shop's equipment would be paid off over the building's term.
Repricing only the property loan works the other way. It trims $34k of interest and leaves every term as it is, though it frees up only $285 a month. One loan on the building for all three debts over 120 months sits between them: one repayment, $2,211 less each month, and $32k more interest.
Apart from repricing the property loan alone, each change swaps a smaller repayment today for more interest over the years. Which one suits your building depends on the shop's lease, the flat's next refurbishment and how the business is trading. We would put each loan's payout figure next to these choices, then take the one you choose to lenders who will lend on a building like yours. These are sums, not offers from any lender.
What can secure the refinanced loans
A mixed-use building gives the owner a few choices about what secures the new loans.
- The building. The shop and the flat together secure the property loan, and can secure the refurbishment and business debts too if they are combined.
- The business. Kept separate, the shop's loans can stay with the business, secured by a general security agreement and the directors' guarantees. Under a guarantee, a director agrees to repay from their own pocket if the business cannot.
- The home. Some owners' homes are cross-secured with the building. Cross-securing means one lender holds both properties as security for all the loans together. A refinance can look at taking the home out once the building and its rents carry the loan without it, subject to valuation and the lender.
Separate lots under a strata plan
Some mixed-use buildings are split into lots under a strata plan, which divides a building into lots that can be owned and mortgaged separately. The shop sits on one lot and each flat on its own. Where that is already in place, each lot can be financed on its own, subject to the lender. That can mean a commercial loan over the shop and a residential loan over the flat. Whether a building on one title can be subdivided is a question for a planner and a solicitor, and our part is funding whichever set-up you hold.
Before you apply to refinance the building
A mixed-use building runs on two calendars, the shop lease and the flat's tenancy, and both shape the application.
Choosing when to refinance the building
Some dates in the building's year affect the cost of moving the loans or the income on show.
- The term end or review date. Starting a few months before the date gives time for a valuation and for lenders to assess the building.
- A fixed rate still running. If the written break cost is bigger than the saving, the comparison can be repeated as the fixed period winds down.
- A shop lease near its end. The lease's end date goes into the application, so the timing can be set around a renewal or a new lease.
- Unlodged BAS or tax returns. For an owner who trades downstairs, it helps to lodge any outstanding BAS, the business activity statement that reports GST (goods and services tax) and other taxes, before applying.
The two kinds of rent the building earns
The shop and the flat pay rent in different ways, under different agreements.
- The shop's lease. A commercial lease sets the rent, the review dates, the options to renew and which outgoings, such as council rates, the tenant pays.
- The flat's tenancy. A residential tenancy agreement sets a weekly or fortnightly rent. The rent ledger shows it has been paid.
Documents to gather
Your property manager, solicitor and accountant already hold much of this.
- A written payout figure from each lender, showing any break cost or charge for paying early
- The shop's lease with its options and rent reviews, and the flat's tenancy agreement
- A rent roll, the list of every tenancy with its rent and end date, and twelve months of rent ledgers
- Council rates, insurance, strata levies if there is a strata plan, and the latest fire safety statement
- Quotes for any refurbishment the refinance will fund
- Every borrower's last two tax returns and sets of financial statements, plus the business's BAS if you trade downstairs
- Statements for the home loan and any personal debts each borrower holds
Interest on the loans may be deductible. How that applies across the shop, the flat and any part you live in is your accountant's call.
Questions owners of a shop with a flat above ask about refinancing
The bank's annual review letter has just arrived. Can I move the loan before the review is finished?
A refinance can run alongside the review, subject to the lender. It helps to have the review letter, the payout figure and both leases ready. This is the lender's review of the loan, separate from the rent reviews in the shop's lease, and our guide explains what the bank reads in a loan review.
How much of my first repayment on the building actually reduces the debt?
In the worked example, $6,182 of the $13,057 first repayment comes off the balance, and $6,875 is interest. About $76,800 is cleared in the first year.
Can the flat upstairs go on a home loan instead?
Where the flat is a separate strata lot, it can be financed on its own, subject to the lender. On a single title, the shop and the flat are one property and one security.
I want to redo the flat's kitchen and bathroom. Can the refinance pay for it?
The new loan can carry the cost of the works, subject to the lender. Builder's quotes set out the works and their cost for the lender.
We hold the building in a family trust. Does that change the refinance?
The trust borrows through its trustee, and the lender reads the trust deed along with the trustee's and guarantors' details. The rent the trust receives, and any rent your business pays it, goes in with the application. Your accountant confirms how the trust and its income are set up.
What are my choices when the property loan's interest-only period ends next year?
Interest-only means each repayment covers only the interest, so nothing comes off the balance. When the period ends, the repayment rises to include the balance. A refinance can look at a new interest-only period, a longer term or a lower rate, each subject to the lender.
If I only reprice the property loan, what does that save?
In the worked example, moving the property loan from 7.5% to 7% over the same 120 months saves $34k of interest and $285 a month.
Our home is security for the property loan as well. Can it come off?
That can be part of a refinance. The building and its rents then need to carry the loan on their own, subject to a current valuation and the lender's assessment.
Can my business's equipment loan go into the loan on the building?
It is possible, subject to the lender. Putting every debt on the building over 25 years, as the worked example does, lowers repayments by $7,699 a month and adds $1,003k of interest.
What would stretching just the property loan to 25 years cost in interest?
In the worked example, $872k more, in return for $4,928 less each month across the three loans.
Talking through the building's loans with us
A refinance lines the property loan, the flat's refurbishment and the business's debts up with the leases and the life of what each loan paid for. Ardent Capital Group is able to assist with the loan on your mixed-use property, an equity release for the flat or shopfront, and the business loans of an owner who trades downstairs. If a second building is next, our mixed-use property finance covers the purchase. The Ardent Capital Group team structures the finance around your building, and your accountant confirms the tax and ownership points ahead of signing. When the time suits you, bring the shop lease, the flat's tenancy agreement and your loan statements, and we will happily work through them alongside you.
