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A guide to hotel finance UK

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By Pete Mugleston   Mortgage Advisor

Last updated: 10th June 2019 *

How do I get a commercial mortgage for a hotel business?

We receive a lot of enquiries from businesses within the hospitality and tourism sector, in particular from people who want to know how they can secure a commercial mortgage for a hotel purchase or who are looking for finance to carry out refurbishment work to an existing hotel.

If you’re looking for hotel finance, 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.

In this article we will cover:

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How can I secure a commercial mortgage to buy a hotel?

Hotel finance in the UK is widely available with a number of lenders keen to assist both new purchases and refinancing for refurbishments.

If you’re looking at how to finance a hotel purchase there are a number of areas a lender will want to review when assessing the viability of your business and whether your future profit projections support your finance requirements.

Once they complete their review, a lender will feed this information into their hotel mortgage calculator in order to establish how much they would allow you to borrow.

Hotel mortgage eligibility criteria

Hotel mortgages are usually assessed on a bespoke, case-by-case basis, but the key factors that will determine how favourable a lender will view a commercial hotel mortgage application include:

Industry experience

A lender will want to understand how much experience you have in the hospitality industry and specifically working within a hotel environment. The more experience you can evidence, the more favourable your application will be viewed.

If your aim is to run a hotel as part of a wider investment portfolio and leave the day-to-day management to somebody else, you should expect a lender to scrutinise your hiring strategy and the experience of those in key management positions, and they may adjust the loan to value (LTV) ratio accordingly.

For larger establishments, a degree in hospitality and/or hotel management would be desirable. In addition a lender may wish to review all the appropriate food hygiene and alcohol licenses that are in place and are up to date.

Occupancy rates

The profitability of a hotel business will largely rely on its occupancy rates. If revenues per available room (RevPAR) and average daily rates (ADR) are high then this will obviously have a positive impact for lenders.

If you are buying an existing hotel business where RevPAR is currently below where it needs to be then a lender would want to understand what your business plan is to improve this figure in order to raise the hotel’s profitability.

Trading accounts

Most lenders will want to see at least two years previous trading history for an existing hotel business in order to assess the affordability of any finance requirements, although are specialist providers who may accept less than this, under the right circumstances.

Business and marketing plan

Most businesses cannot survive in an online world without a solid marketing strategy and this includes the hotel sector. Reliance on repeat trade is not considered an effective long-term plan and lenders would not look positively if this is the case.

Location

For any hospitality and tourism business, location can play a key part in its success. For a hotel business looking to secure finance, a lender will look more favourably if it’s proximity (close to transport hubs, office buildings, entertainment centres) is deemed a major factor in influencing its profitability.

Of all the above factors, experience could be considered most crucial. The more experienced you are in your line of business the more able you should be at influencing the overlying profitability.

However, if you have little or no experience at running a hotel but can demonstrate business acumen in other sectors, some lenders will still be keen to assist with financing your purchase.

If you’d like to understand more about commercial mortgages and what information lenders will focus on when assessing the viability of a hotel business take a look at our detailed guide here. Alternatively, make an enquiry and we can arrange for an expert to call you directly.

How can I get the best mortgage rates for my hotel business?

The best way a hotel business can secure the most favourable mortgage terms would be to present the most robust case to a lender which fulfils most, if not all, of the points made in the section above.

The more experience you can evidence within the hotel industry, positive occupancy rates and an effective marketing plan with clarity on how to achieve future projections. All of these factors should ensure a lender is more willing to offer the best mortgage rates for your hotel’s borrowing requirements.

If you make an enquiry with us we can arrange for a mortgage broker we work with who can offer the best whole-of-market advice to contact you directly and discuss the requirements for your hotel purchase.

Can I use a commercial mortgage to finance a hotel refurbishment?

Yes this could be possible. Depending upon the extent of the renovations required a commercial mortgage could well be the most appropriate form of lending. For amounts below £25,000 an unsecured business loan may be the best way forward.

Any significant renovation to a hotel business could result in a large upturn in revenue performance. If you can demonstrate that the aim of your refurbishment plan is to substantially change the quality of your hotel most lenders would deem this a positive move and could be a worthwhile project to undertake.

If you currently run a hotel and want to consider how to finance a refurbishment, make an enquiry with us and we can arrange for an expert to contact you to discuss your plans further.

What other types of hotel finance loans are there?

Besides business mortgages, there are a number of other forms of commercial lending which could help you finance a hotel purchase.

Alternatives include…

  • Hotel bridging loans
  • Development finance
  • Asset finance
  • Other funding options

Using asset finance to buy a hotel

Asset finance could well be a very useful form of lending for a hotel business to utilise for the equipment it would require to run its day-to-day operations such as - computer hardware/software, office equipment and room furniture.

However, in terms of appropriate lending for purchasing a hotel or refurbishment finance, a commercial mortgage or other form of business loan could be a more viable option.

Using a bridging loan to buy a hotel

Bridging loans are a way to finance your hotel purchase promptly, if needed, or on more flexible terms than a mortgage lenders are typically in a position to offer. For example, if you’re buying a hotel at an auction or there is another interested party in a property and you want to complete the deal quickly.

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 now have sufficient scope to refinance your lending with a commercial mortgage or you intend to sell your hotel once the loan ends.

If you’d like to know more about bridging loans you can read all about this type of lending here.

Using development finance to buy a hotel

If you’re looking to fund a hotel purchase, literally, from the ground up and build a brand new complex or your premises requires major renovation work then development finance could be a viable consideration.

This type of borrowing shares some similarities with bridging finance. The key difference is that the total amount you borrow is released in staged draw-downs 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 scheme to your own specifications (assuming you have the means and expertise to do so).

Once your new hotel has been completed you could then, as with a bridging loan, look at refinancing over the longer term or sell the business - this will need to be clarified from the outset and most lenders will insist on an exit strategy.

If you’d like to understand more about development finance and whether it could be used to fund your hotel purchase take a look at our detailed guide here.

Using other funding options to buy a hotel

There are a number of other alternatives to commercial mortgages in addition to those mentioned above. For example, if you have a large investment portfolio of businesses and properties you could consider refinancing them to release some of the equity to fund future purchases.

The advisors we work with are all well versed in the funding options available for all different kinds of commercial requirements. If you make an enquiry with us we can arrange for an expert to contact you directly to discuss further.

Do hotel mortgages need a large deposit?

Generally, most lenders require a deposit of between 25-40% for commercial mortgages depending upon the level of risk they deem to be taking and the type of commercial mortgage requested.

For commercial hotel mortgages most lenders will require a deposit of 40%, some will require 30% and a few will allow 25% based on the strength of the business’ trading accounts, future profit projections and the borrower’s credit record.

Is it possible to get 100% hotel finance?

It may be possible to convince a commercial finance provider to lend you 100% of the funds you need to bankroll your hotel investment, but these deals usually require the borrower to put up additional security, such as a property or asset they own and hold sufficient equity in.

This comes with the risk of multiple repossessions if you default on your commercial mortgage, but if you make an enquiry, the experts we work with can help you carry out a risk assessment before pairing you with the right lender.

Can I get hotel finance with a poor credit record?

A poor credit history can, no doubt, cause problems with how much a lender may be prepared to lend you for hotel finance, depending on the type of issue you’ve had and when it was registered.

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, usually requesting a higher deposit to help minimise the level of risk.

For more information on this see our article 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 hotel mortgage lenders
  • Can offer bespoke advice on the hotel market
  • 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.

Updated: 10th June 2019
OnlineMortgageAdvisor 2019 ©

FCA disclaimer

*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.

Find out more about Commercial Mortgages

Commercial Mortgage Guide