We receive many enquiries from both current and prospective business owners regarding commercial mortgages and, in particular, whether this type of lending is appropriate for their specific business activity.
One sector we receive quite a lot of interest from is hospitality and tourism. More specifically from people looking at how to finance buying a bed and breakfast business or renovate an existing premises. As this is a very traditional industry, the good news is there’s lots of opportunities to access information and lending expertise.
If you’re looking for a B&B mortgage solution, read through the information below then make an enquiry with us so we can arrange for a commercial mortgage expert to speak with you directly.
Do I need a commercial mortgage for my B&B or should I use a residential mortgage?
A commercial mortgage is the most appropriate type of lending for anyone looking to buy a property for their business or commercial activity, whereas a residential mortgage is best suited for the purchase of a property with the intention of living in it.
There are some quite clear distinctions between when to use a commercial mortgage and when to use a residential mortgage in the UK. However, there are a few instances where these lines can sometimes appear blurred. This is particularly the case for B&B mortgages.
Most B&B proprietors also live at their guest house. So, if you’re looking to buy a bed and breakfast business, do you need a residential mortgage or commercial mortgage?
The answer comes from how much of the property is used as a commercial concern and how much is used as personal space. If the area of a B&B property used for residential purposes is more than 40% then a residential mortgage can be used. However, if it is less than this then a commercial mortgage will be required.
Why is this so important?
This is a fairly common mistake made by B&B proprietors but it can also prove to be quite a costly one. Because interest rates are normally more favourable for residential mortgages than for commercial a lender may conclude that an applicant has been dishonest in order to get a lower rate.
If such a conclusion is reached a lender could call in the mortgage on the basis of a breach of covenant meaning you would need to pay back the amount borrowed. It could also make it difficult for any future borrowing requirements.
This is why it’s extremely important to seek the correct advice from an experienced adviser. If you’re looking at how to finance your guest house, make an enquiry with us and we can arrange for a specialist to contact you directly.
How can I secure a commercial B&B mortgage for my guest house?
Running a B&B has become a highly desirable career choice pursued by many, in particular those considering semi-retirement. The good news is, if you’re looking at making the jump into a B&B business, many lenders will have the knowledge and expertise to assist with any lending requirements you have.
How do lenders assess B&B mortgage applications?
When lenders review applications for commercial B&B mortgages the first thing they will want to understand is how much experience you have in this particular sector. The more experience you have, the more favourable a lender will consider your borrowing needs.
A lender will also want to know you carry all the appropriate licenses to run such an establishment. If your intention is to run a B&B business as an investment then a lender will want to know your plan for hiring somebody with the appropriate experience to manage the day-to-day business.
If you have little or no experience of running a guest house, don’t panic, there are still some lenders who will consider your application. However, what they will want to see is a robust business plan and clearly thought out profit projections.
Any business plan would need to include any renovation requirements (and how they will be funded) , a detailed understanding of your local market and how you intend to succeed versus your immediate competition. This should also incorporate any marketing plans you have to hit your key occupancy rate targets.
The busier your guest house is, the more profitable it should be and, as a result, your mortgage payments should look much more affordable to a lender.
If you’re looking to secure a mortgage for a B&B business or an existing proprietor looking for possible refinancing options or to add to your portfolio, make an enquiry with us and we can arrange for a specialist in this area to get in touch.
How much trading history do I need for a B&B mortgage?
Most lenders will be reluctant to approve finance for a B&B mortgage without a strong previous trading track record. The majority will want to see the previous 2-3 years accounts for the bed and breakfast business you are looking to purchase or raise finance for, however, some may accept less than this.
If you’re buying a bed and breakfast business for the first time and the previous records show a poor trading record with low occupancy rates there are some specialist lenders who will consider your application. This would be based on your ability to demonstrate a clear route to profitability under your new ownership and management team.
If you’d like to understand more about commercial mortgages and what information lenders will focus on take a look at our detailed guide here. Alternatively, make an enquiry and we can arrange for an expert to call you directly.
How much deposit do I need for a B&B mortgage?
Generally, most lenders require a deposit of between 20%-40% for commercial mortgages depending upon the level of risk they deem to be taking and the type of commercial mortgage requested.
For B&B mortgages most lenders will require a deposit of 40%, some will request 30% and a few will allow 25% based on the strength of the business’ trading accounts, future profit projections and its location (this will have a bearing on occupancy levels) as well as your profile as a borrower.
Other than a commercial mortgage, what options are available to finance my bed and breakfast business?
Taking out a commercial mortgage isn’t the only way to buy a B&B property. There are other funding options you could explore, including...
Unsecured business loans
If the amount you need to finance your B&B business is a fairly minor amount (less than £25,000) it may be more viable to consider a shorter term option such as a business loan which would not require any security for the lender and could be arranged fairly quickly. This might be viable if you already have some capital to invest, but need more.
If the amount you require is larger than £25,000 the options outlined below may be more suitable alternatives to a commercial mortgage, depending on your circumstances.
If you need to complete your B&B business transaction quickly then bridging finance may be a solution as this form of borrowing is designed for such situations.
As the name suggests, bridging finance is a ‘bridge’ between a purchase and a clearly defined exit strategy. This could mean that by the end of the bridging loan term (usually 12-36 months) you decide to refinance your lending with a commercial mortgage or you intend to sell your bed and breakfast business.
If you’d like to know more about bridging loans you can read all about this type of lending here.
Development finance could be a consideration if your intention is to build your bed and breakfast property from scratch or you need to fund a major renovation to the premises you’ve acquired.
This type of borrowing shares some similarities with bridging finance. The key difference is that the total amount you borrow is released in staged drawdowns as the building construction or renovation takes shape.
The benefit of using development finance is that you only pay interest on the amounts that have been released to you and you can build the B&B to your own specifications (assuming you have the means and expertise to do so).
If you’d like to understand more about development finance and whether it could be used for your bed and breakfast business take a look at our detailed guide here.
Releasing equity from other properties or assets
If you already own a large portfolio of business properties (or assets) you could also consider releasing the equity from within this portfolio to fund any future purchases. This option would negate the need for any significant cash outlay for a deposit as would be the case for a commercial mortgage.
If you make an enquiry with us we can arrange for an advisor we work with to go through each of these options, and others, in much more detail to establish which may be best suited for your circumstances.
Can I get finance for my Guest House business with a poor credit history?
A poor credit history can, no doubt, cause problems with how much a lender may be prepared to lend you for a guest house commercial mortgage, depending on the type of issue you’ve had and when it was registered.
In short, clean credit isn’t always a must for commercial lenders but it could help you get the best guest house mortgage rates.
Some lenders might offer unfavourable rates or turn the borrower away if there’s bad credit on file, but there are specialist commercial lenders who cater for individuals and businesses with various forms of bad credit.
For more information on this see our page on bad credit commercial mortgages here.
Alternatively, make an enquiry and we can arrange for an expert to contact you directly and discuss further.
Why you should speak to a commercial mortgage broker
At Online Mortgage Advisor we can offer you a first-class service tailored to your own specific needs with access to the most experienced brokers available that:
Have whole of market access
Have excellent relationships with B&B lenders
Can offer bespoke advice to customers who are in the market for a B&B
Are OMA accredited advisors
Have completed a 12 module LIBF accredited training course
Speak to a commercial mortgage expert
If you have questions and want to speak to an expert for the right advice, call Online Mortgage Advisor today on 0800 304 7880 or make an enquiry here.
Then sit back and let us do all the hard work in finding the broker with the right expertise for your circumstances. – We don’t charge a fee and there’s absolutely no obligation or marks on your credit rating.
*Based on our research, the content contained in this article is accurate as of most recent time of writing. Lender criteria and policies change regularly so speak to one of the advisors we work with to confirm the most accurate up to date information. The info on the site is not tailored advice to each individual reader, and as such does not constitute financial advice. All advisors working with us are fully qualified to provide mortgage advice and work only for firms who are authorised and regulated by the Financial Conduct Authority. They will offer any advice specific to you and your needs. Some types of buy to let mortgages are not regulated by the FCA.Think carefully before securing other debts against your home. As a mortgage is secured against your home, it may be repossessed if you do not keep up with repayments on your mortgage. Equity released from your home will also be secured against it.
Pete, an expert in all things mortgages, cut his teeth right in the middle of the credit crunch. With plenty of people needing help and few mortgage providers lending, Pete found great success in going the extra mile to find mortgages for people whom many others considered lost causes.
The experience he gained, coupled with his love of helping people reach their goals, led him to establish Online Mortgage Advisor, with one clear vision – to help as many customers as possible get the right advice, regardless of need or background.
Pete's presence in the industry as the 'go-to' for specialist finance continues to grow, and he is regularly cited in and writes for both local and national press, as well as trade publications, with a regular column in Mortgage Introducer and being the exclusive mortgage expert for LOVEMoney. Pete also writes for OMA of course!
Read more about Pete here...