Securing a Commercial Mortgage for a Care Home

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The care home sector continues to grow, proving popular with both potential buyers, and lenders. The UK has an ageing and growing population, which is the driving force for an increase in care facilities.

This demand is unlikely to diminish and, as such, investing in a care home is a wise move. With values rising and profits strong, the market is booming. In this guide, we’ll run through exactly how you can fund your care home purchase.

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Key criteria points

There are a number of factors to consider when looking to buy a care home and finding the right business mortgage can prove tricky.

Client experience

The level of experience of the potential borrower is a key consideration in a lender’s decision to invest in a care home purchase. The lender will be keen to ensure that the applicant has sufficient experience in the sector to ensure the home will be well managed.

Poor management can lead to poor standards of care, which creates an overwhelmingly negative experience for the residents. In addition, issues around care standards can lead to high profile PR disasters for all involved.

For purchases, if you own other care homes, Care Quality Commission (CQC) or equivalent reports on your current home may be used to predict likely practices.

Due to the above factors, experience in running care homes is very important. First time operators can apply, and may well be successful in their funding application, but a person with experience of working in the sector at some level is far more likely to be approved.

Generally, ‘High Street’ lenders will only lend to people with experience of at least 2 years in owning a care home already.

Occupancy rates

Occupancy rates are an indicator of demand for the service. If occupancy rates are consistently low, it may be a warning sign that there is an issue. This could be due to a number of factors. If the CQC or OFSTED rating is poor, it is unlikely that people would want to use the service. Location could also be crucial, if the property is near to other homes or in an undesirable location, this will naturally affect occupancy.

From a mortgage point of view, low occupancy rates will reduce the turnover and profitability of the business, which in turn will affect affordability.

Regulatory ratings

Regulatory ratings, e.g. CQC or OFSTED, are used in a number of ways to assess your commercial mortgage application. For refinances, the rating will be used as a straight assessment of the running of the care home.

For purchases, a poor rating may also cause problems, as a home with multiple issues may be seen as difficult to turn around. As a result, your experience will come under further scrutiny, as mentioned above.

If you run homes with a good rating or have experience in improving ratings, lenders will obviously be more inclined to take a positive view when lending to you.

High Street banks tend to stay clear of any rating that isn’t ‘good’ or above. Challenger Banks or secondary lenders may take a view however due to the sensitive nature of the sector, criteria is still fairly strict.

The main regulatory bodies are:

  • The Care Quality Commission (CQC) in England.
  • The Care Inspectorate in Scotland.
  • The CSSIW in Wales.

Trading accounts & affordability

Details of trading performance is vital in securing a care home mortgage. Lenders will use the previous trading history to assess the ability to repay the loan once issued.

Where previous trading history has been poor, but there is potential to increase profits, this must be clearly demonstrated with a business plan.

Of course, lenders are willing to be flexible and take a view of the likely improvements in trading, but this must be backed by detailed projections and a business plan.

What terms can I expect to receive?

The finance terms offered on care home purchases are usually priced according to the risk associated with the application. Larger loans, for highly profitable businesses with excellent Regulatory Body Ratings are likely to secure the best terms.

As a guide, finance terms for care homes are available as follows:

  • Up to 90% Loan to value
  • Interest only or repayment (repayment preferred by most lenders)
  • Loans from £100,000 – no maximum loan size
  • Rates from 2.25%
  • Borrow for up to 20 – 25 years

I’m looking to by my first care home, can you help?

First time care home operators will have to prove their ability to run a care home and will have a lot more steps to take prior to completion.

High Street style lenders steer clear of first time operators however some lenders are willing to lend, if they feel comfortable and there are no risks involved.

The task is made much easier if you already have industry experience to fall back on. There are also a number of trade qualifications available, which will further bolster your perceived experience. By taking a registered management qualification prior to your application, you will improve your chances of a successful application.

If you already work in the medical or care sector and can demonstrate that you have the ability to run a care home, lender will look on this positively.

Another matter to consider is the time taken for the regulatory body to approve you, allowing you to become a care provider. All applicants are interviewed face to face, and according to the CQC the process takes around 10 weeks to complete, if the applicant is well prepared.

Experience can dictate the process meaning it can go on for much longer than this, so be prepared for delays in your application.

If you’re taking over a trading care home, you could look to keep the registered manager & staff on. They will have an understanding of the business as well as existing relationships with the occupants and relatives, minimising upheaval.

Remortgaging your care home

Care home refinancing relies heavily on current trading performance and regulatory ratings. As the care home is already trading with the same management, the lender will have a good idea of the likely future performance.

Potential lenders will occasionally accept projected trading figures. This is only usually possible when there is a material change to the business going forward. This could include a change to the management or staff structures, major cost savings or alterations to the care home itself.

Expanding your portfolio

If you’re an existing care home operator and are looking to purchase a new property to grow your business, a mixture of the above approaches will be used.

The lender will usually take into account the current trading and CQC performance to get a measure of the current business. They will then check the position of the new home.

Where ratings are in need of improvement, your experience will be judged to see whether you can turn the situation around. Similarly, poor financial performance will be judged alongside the performance of your current homes.

A common-sense approach is then taken to understand whether the overall affordability position is sufficient to support the loan.

Timescales & application details

We are usually able to complete commercial mortgage applications in around 6 – 12 weeks. Depending on the situation with CQC applications, this timescale is realistic.

Where CQC applications have to be made, these timescales can vary, although your finance should be agreed within the above timescales.

Number of rooms

There has been a shift in recent years towards favouring larger homes, with homes at 26 beds or above securing the best terms.

For homes that are offering specialist care, such as dementia or disability, smaller homes are still popular with lenders, there are no minimum number of rooms for this type of funding.

Where funding is required for an elderly care home that is under 28 beds, we can still offer funding and of course, still work on your behalf to secure the best possible rates.

How do lenders view care homes?

Lenders remain very positive about the care home sector, with strong businesses, or strong applicants proving to be a safe bet. If you have a well-performing care or nursing home business, or a good reputation for managing in the sector, lenders will be keen to support you.

The sector continues to be popular with borrowers and lenders alike, meaning funding your care home could be easier and cheaper than you think.

Different types of care

Lenders remain very positive about the care home sector, with strong businesses, or strong applicants proving to be a safe bet. If you have a well-performing care or nursing home.

Elderly care home

An elderly care home, or nursing home, is a place where elderly people can live and have help with washing, dressing and have meals cooked. The nursing element comes in to play if nursing care is also required i.e. medical needs. Some elderly care homes have specialisms such as dementia care. The UK has a population of 66.8 million, of this, almost 12 million are aged 65 or above.

Supported living

Supported living, or domiciliary care, is a service that allows you to remain at home but may be unable to look after yourself fully. This could be daily visits from somebody to help with cooking, cleaning or washing.

Children’s care home

A children’s residential home is a provision where children can live if they have needs that may not be met by living with a family. Children’s care homes tend to be regulated by OFSTED. Recent data shows that 78,150 children are currently in care.

about-the-author-gary-hemming

About The Author

This content was produced by our Commercial Lending Director, Gary Hemming. Gary has over 15 years’ experience in financial services and specialises in bridging loans, commercial mortgages, development finance and business loans. He is widely respected in his field and regularly provides expert commentary for specialist trade publications, specialist business press as well as local and national press.

Gary Hemming CeMAP CeFA CeRGI CSP  -  
Commercial Lending Director

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