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The hotel industry has taken a hit as a result of the pandemic, with hotels having to close during lockdowns and travel being restricted. But with the successful vaccine roll-out and the easing of restrictions, the industry is set to grow again, which could make buying a hotel a good business move as long as you do your research.
If you do want to buy a hotel to run as a business and don’t already have the cash available you’ll need to secure finance. A commercial mortgage is one option. You can also use one if you need to refinance a hotel you already own.
Commercial mortgages are mortgages secured on property that isn’t your home and are designed for people who are buying property to run as a business or use as business premises. If you’re buying a hotel as an investment, such as to let out, you’ll need a different type of mortgage – a commercial investment one.
It’s possible to get a commercial mortgage to buy a hotel but as with buying any other type of business it depends on a range of factors, including how the business is doing, your experience in the industry, your business plan, whether your trading figures can give the lender confidence that the mortgage will be affordable and your credit history.
There are a range of lenders that offer commercial mortgages, including established high street banks such as Barclays, Lloyds Bank, NatWest and the Royal Bank of Scotland, newer challenger banks, which may have a more flexible approach, and specialist lenders.
It’s a good idea to speak to a specialist commercial mortgage broker who can look at the whole available market to find the best deal for your circumstances and help you through the application process. They will also know which lenders are most likely to lend to you.
You can borrow up to 70% of the hotel property’s value, depending on the lender, although the loan amount can also be assessed on the ‘going concern value’ – in other words, the total value of the business – where you may be able to borrow up to 60% of it. It may be possible to borrow more than this if you have additional assets to use as security.
As with residential mortgages, terms can be up to 25 years or sometimes 30, with minimum terms of as little as one or two years depending on the lender. The minimum amount you can borrow is usually £25,000.
Commercial mortgages are more expensive than residential ones as they are considered to be higher risk. Interest rates tend to be variable, either based on the Bank of England base rate or Libor (London inter-bank offered rate), rather than fixed and are bespoke to the borrower according to your situation.
Lenders will determine whether to lend to you and what rate to offer based on the level of risk it thinks it will be taking on. It will look at the following:
Documentation you may need to provide when you make your application includes bank statements, two or three years of accounts, your business plan, projections of the income the hotel is likely to generate in the future and proof of identity and address. The lender will also carry out a valuation of the property.
There are a range of other options if you want to buy or refinance a hotel, depending on your circumstances, how long you need to borrow the money for and whether the hotel needs work done to it before it can operate:
Bridging loan – this is short-term finance that is useful if you need to raise money quickly, such as because you’re buying at auction. Although it’s more expensive than a mortgage it’s designed to be paid back within one to three years. You’ll need to have an exit strategy in place – to renovate the hotel and then sell it, for example.
Business loan – if you only need to borrow a small amount (less than £25,000) a business loan could be a good option. Unlike a mortgage, it’s not secured on property.
Development finance – this is designed for major building projects so is an option if you’re building a hotel from scratch or carrying out a significant renovation. The money is released in stages and you only pay interest on the money that has been released to you.
Taking out a commercial mortgage to buy or refinance a hotel is cheaper than using other types of finance and is a good option if you need to borrow money long term. However, as it can take six to eight weeks for the mortgage to be granted they may not be suitable if you need money quickly. They can also be less flexible in terms of lending criteria and repayment than bridging loans.
A commercial mortgage can offer good value when you need finance to buy a hotel but speak to a mortgage broker to get the best deal. You can compare commercial mortgage rates here.
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