How do I obtain a mortgage for a hotel?
Whether you’re looking to either buy or remortgage a hotel, guesthouse or B&B, we’re on hand to help you throughout the process.
Obtaining a mortgage for the hospitality sector can be challenging at present, but that doesn’t mean it isn’t doable. The information below is a handy guide to the process.
Hotel mortgage interest rates and fees
The pricing of your application depends on the level of risk taken on by the lender. The perceived risk is decided on the trading history of the hotel, the location, the loan size and loan to value and your background and experience.
- High street banks tend to offer the lowest interest rates, starting at around 2.25% for very strong applications. By strong, we mean the LTV is below 60%, the hotel is trading profitably and you have vast experience in running a hotel. Also, larger loan sizes of around £500,000 or more tend to have the lowest rates. You could expect to pay 3%-3.5% for a smaller loan size. High street banks also prefer to lend on a capital repayment basis, although some will offer interest only for a short period if there is good reason. The lender will charge a fee of between 1% and 2%.
- Challenger banks take a slightly more relaxed view when lending. Rates usually start at 3.5% for strong applications. Challenger banks also offer higher LTV’s, generally 70% as a maximum and are happy with interest only. If the application isn’t as strong, 4.5% – 6.5% is fairly common. Lender fees are typically between 1.5% and 2%.
- Specialist commercial mortgage lenders tend to be far more understanding of previous credit problems or poor trading performance. You’ll find that they require less robust financial information and may work off projections alone. The price you pay for working with these lenders are higher interest rates and lower loan to value limits. Depending on the situation, interest rates will vary from 6.5% – 18%. Due to the higher interest rates, interest only is usually the only viable option. Lender fees are usually between 1% and 3%.
Click here to find a selection of the best commercial mortgage rates or speak to one of our advisors.
Who offers hotel mortgages?
Mortgages for hotels can largely be broken down into three different types of lender, as follows:
- High street banks – These are the well-known banks that you’re used to seeing on the high street, albeit usually specialist commercial divisions of them. They tend to have the tightest criteria and as a result, the lowest interest rates and lowest loan to value ratios (LTV)
- Challenger banks – These tend to take a slightly higher risk approach by relaxing the criteria around affordability and offer higher LTV’s. Challenger banks will charge slightly higher interest rates in most situations, as a result of their more relaxed approach to assessing applications.
- Specialist commercial mortgage lenders – They tend to be far more understanding of previous credit problems or poor trading performance. You’ll find that they require less robust financial information. The price you pay for working with these lenders are higher interest rates and lower loan to value limits.
Obviously in 2020, Covid-19 had a major impact on the hospitality sector, with most hotels closed for long periods during lockdown. Many people are deciding against travelling abroad which means 2021 is proving to be the year of the UK staycation, this is a huge boost for hotels, guesthouses and B&B’s.
Due to Coronavirus, mortgage lenders have expressed extreme caution when lending to this sector, especially with businesses relying on the tourist trade. A closed hotel means no income to support the mortgage, an obvious concern for any lender.
As some employees have been able to continue travelling for work, some hotels have managed to remain open. Lenders are keen to lend to any strong business, evidencing income throughout the COVID period along with proof of future bookings.
Some lenders require anybody to have borrowed under the Bounce back loan scheme (BBLS) to repay the loan in full before they’ll lend.
With the hotel industry now starting to benefit from strong demand, lenders are now becoming keen to support the industry again. Whether you’re looking to purchase a booming hotel, buy a fixer upper, or start-up a new, or currently closed hotel, we can help.
Key criteria points
There are numerous key factors in securing funding for hotels. Whether purchasing a new business, refinancing or refurbishing a property, commercial mortgage lenders are keen to support borrowers in the sector.
Experience in the hotel, or hospitality industry is preferred by most lenders. Although being a relative newcomer doesn’t mean a commercial mortgage is out of the question.
If you currently own or run a hotel, guesthouse or B&B or have done previously, lenders will look upon this experience positively.
If you’re looking to move into the industry with no experience, the lender is more likely to look kindly on an application involving an existing trading hotel that is running successfully.
Where there is no experience in running hotels whatsoever, experience in running a business, acting as a manager or even providing strong customer care will strengthen your application.
Historic and future performance of the hotel
Where you are financing a hotel that is already trading, the lender will want to see the financial accounts, ideally covering the last 2-3 years. This will give the lender a good understanding of the strength of the business.
If profits are increasing year on year, this obviously gives confidence whereas if profits are declining, this can be cause for concern, unless there is good reason. If you can demonstrate future bookings and strong demand, this again gives the lender confidence.
If the hotel is running well and has strong occupancy rates, demand can easily be demonstrated. Without strong demand for the product, profits will be impacted negatively, which will clearly not help your commercial mortgage application.
Lenders are keen to lend to businesses with a good reputation. If a hotel is suffering from numerous negative online reviews, they will want to understand how this is to be resolved.
Where there is a change of management, clarity around the improvements and how the reputation will be repaired is key. Turning around a hotel that is failing to treat its guests well is a strong win for applications.
Where you’re expecting to turn around a hotel with previously poor customer service, experience of where you have managed a similar situation will put the lender at ease.
The lender will assess the trading performance using the latest 2-3 years accounts for the business. They will check the EBITDA (Earnings Before Interest, Tax, Depreciation and Amortisation) to check the affordability of the loan.
EBITDA shows the trading position of the business without certain accounting practices and costs being taken into account. This allows them to understand the true profitability of the business, and its ability to support the loan repayments.
Changes to the business
When buying a business or raising capital to put back into moving the business forward, past financial performance may mean little when predicting future income. As such, if you’re making changes to the business and expect financial performance to improve as a result, your lender may be willing to accept these when assessing the application.
Of course, the figures must be backed up by evidence of research and a business plan. This is true whether you’re projecting an improvement to the financial performance, or customer satisfaction and reputation.
Changing management structures
A change in management structure can result in eradication of problems around the reputation of the business very quickly. In addition, where previous management structures were either very expensive or not running the hotel to its full potential, there is scope for improvements overnight.
As such, details of any change in the management structure of the business should be laid out upfront. This can be a key point in the purchase of a hotel.
Refurbishment & renovation
Refurbishment of the hotel can also produce a dramatic change in revenue. Firstly, the cost of the works and your ability to fund that, along with any impact on capacity must be taken into account.
In addition, where there is a big change in the standard, aesthetic or type of hotel, this may impact on the trading performance.
Where only light works are needed to refresh a property, a commercial mortgage lender may be happy to help.
Commercial mortgage lenders may be unwilling to lend on a property where heavy refurbishment work is to be carried out, as this could impact their security should something go wrong. If the renovation is heavy, i.e. structural or will require the hotel to close for a period of time, a short term bridging loan may be more suitable.
Some hotels rely on repeat trade and their marketing has been practically non-existent for a number of years. Those hotels may not be reaching their capacity in a world of online hotel booking. Large changes to marketing strategies – either how bookings are generated, or the addition of special events and private functions – will be considered.
If you’re planning to make major changes to a hotel of this nature, where affordability may be tight, some lenders will allow you to use projections. Projections are designed to supplement the current financial accounting figures, showing both the expected position going forward.
Online presence is vital in the hospitality sector. Both customers and lenders will be looking at the online hotel reviews before making a decision. A good website with a variety of photos and descriptions, coupled with good customer reviews will naturally increase demand, and profits.
Marketing existing customers with availability, upcoming events in the area and special offers is a good way of making sure your occupancy rates are high. You can also reach out to local companies who may have the need for accommodation for staff or clients.
Commercial mortgages for hotels are usually often based on the ‘going concern value’. This means that both the property and business value can be considered by the lender. We can usually fund up to 65% of the going concern value, or 75% of the property value, depending on your application.
Some lenders will allow you to take out your application on a capital repayment, or interest only basis, and most will offer both fixed and variable rates. In addition, we can usually offer:
- Interest rates from 2.25%
- Loans from £50,000 with no maximum loan size
- Lending terms of up to 25 years (some lenders will restrict borrowing to 15 years)
What other types of funding is available for hotels?
For those looking to raise further funds for their hotel business, we can also provide the following: