Mortgage for a pub
We look at how mortgages work if you want to buy a pub and alternative funding options to consider.
Have you always dreamed of running your own pub? If the answer is yes and you’ve now decided to take the plunge but need to borrow money to buy one, there are a range of options. As the pub trade has struggled over the pandemic, however, you’ll want to keep costs down more than ever so it’s important to choose the best-value type of funding for your needs.
Can you get a mortgage for a pub?
Yes, it is possible to get a mortgage to buy – or refinance – a pub and this is likely to be the cheapest option versus other ways to borrow. As it’s for a business, though, it will work differently to a residential mortgage.
Whether a lender will lend to you, how much you can borrow and the rate you’ll get will depend on a range of factors, including your level of experience in the industry, how well the pub has done in the past, its location, how much you can afford to pay back and your credit history.
What type of mortgage can you get?
The type of mortgage you can get to buy a pub is a commercial mortgage. This is a mortgage secured on a property that isn’t your home and is designed for buying a business you’re going to run or a property you’re going to use as business premises.
If you’re buying the pub to let to someone else you’ll need a commercial investment mortgage instead.If you’re buying a pub that will also be your home – you’ll be living in a flat above it for example – you’ll need a semi-commercial mortgage, which is designed for mixed-use properties.
Mortgages for any property where at least 40% of it is going to be your home are regulated by the Financial Conduct Authority (FCA), which means the lender has to follow certain rules to make sure the mortgage is right for you and that you can afford it. This could reduce your choice of lender and lengthen the application process as there are more checks that need to be made and more paperwork involved.
Lenders offering commercial mortgages include well-known high street banks, challenger banks, which may offer more flexibility but charge a higher interest rate to make up for the increased risk, and specialist lenders.
You should speak to a mortgage broker to find the best deal for you as they will be able to look at the whole available market to find a loan to suit your circumstances and may have access to deals not available directly from lenders. They will also help you through the potentially complicated application process.
How does a mortgage for a pub work?
You can borrow up to 60-70% of the property’s value depending on the lender, although the percentage may be based on the ‘going concern’ value (the value of the property plus the business) rather than the value of just the property.
It may be possible to borrow up to 100% if you have additional assets to use as security for the loan, such as another property you own. You may also need to provide extra security if you’re buying a leasehold pub rather than a freehold as this is riskier for the lender.
As with a residential mortgage the term can be up to 25 or sometimes 30 years, although some lenders set a lower maximum. The minimum allowed is usually one to three years.
Interest rates tend to be variable and either based on the Bank of England base rate or the Libor (London inter-bank offered rate) and, unlike with residential mortgages, are based on your circumstances. The more experience you have of running a pub, the more profitable the pub business has been (you’ll need to provide two to three years of accounts) and the better its location, the lower the rate you’re likely to get.
The amount you can borrow will also depend on how much you can afford to pay back based on the performance of the business and income projections as well as the value of the property.
The lender will also look at your credit history. You may still be able to get a commercial mortgage if you’ve had credit problems in the past but it’s likely you’ll be offered a less favourable rate. If this applies to you it’s even more important to speak to a mortgage broker to find the best deal.
You may also have to pay arrangement fees of 1-2% of the loan plus valuation and legal fees.
What other types of funding are available?
A commercial mortgage might not be the best type of funding for your pub purchase or refinance. Other options include:
- Bridging loans – these are a type of short-term finance and tend to be more expensive than mortgages. They are useful if you need to borrow money quickly or want to buy a dilapidated property, which will be unmortgageable. You’ll need to have an exit strategy in place (how you plan to pay off the loan), which could be getting a mortgage to pay it off when you can.
- Development finance – this could be more suitable if you plan to build a pub from scratch or carry out a major renovation of an existing building. The funds are released in stages, which means you only pay interest on the money you’ve borrowed up to that point.
- Business loan – if you need to borrow less than £25,000 this is another option to consider. It isn’t secured on property.
Pros and cons of pub mortgages
A commercial mortgage is a good-value option for buying or refinancing a pub but may not be suitable if you need to raise the money quickly or want to buy a building that’s in a poor condition.
If you want to buy or refinance a pub, a commercial mortgage is likely to be the best way to fund it but speak to a specialist mortgage broker to get the best deal. You can also compare commercial mortgage rates here.
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