Securing a commercial mortgage for a hotel

Whether you’re an experienced hotelier looking to expand your portfolio, a business entrepreneur venturing into the hospitality industry, or a foreign investor aiming to establish a foothold in the UK hotel market, understanding the complexities of hotel mortgages is crucial. A hotel mortgage can pave the way for securing the ideal property, executing extensive renovations, or boosting operational funds. However, the terrain can be quite intricate, with considerations ranging from the type of hotel (franchised or independent), the involvement of co-borrowers, and the appropriate use of funds.

In the UK, securing a hotel mortgage involves navigating a range of options, fulfilling specific requirements, and potentially confronting unique challenges. This guide aims to illuminate this path, offering valuable insights and helpful information about hotel mortgages, the application process, the implications for non-UK residents, and many other related topics. So, whether it’s your first business venture or you’re looking to grow your existing enterprise, here is a comprehensive resource to aid your journey in the exciting and potentially lucrative world of hotel ownership.

What is a hotel mortgage?

A hotel mortgage is a type of commercial mortgage specifically used to finance the purchase or renovation of a hotel property. This could be anything from a small bed and breakfast, a boutique hotel, to a large, multi-story chain hotel.

Just like with a residential mortgage, the property being purchased serves as collateral against the loan. If the borrower fails to make payments, the lender has the right to seize the property.

How can I get a mortgage for a hotel business?

Securing a mortgage for a hotel business can be a complex process due to the factors that lenders consider, including the potential profitability of the hotel, its size, condition, location, and more. Here are some general steps you could follow:

Business plan: Start by crafting a comprehensive business plan. It should include detailed revenue forecasts, a marketing strategy, operational plans, and an analysis of the competitive landscape. Highlighting your (or your team’s) experience in the hospitality industry can also be beneficial.

Financial analysis: Be prepared with thorough financial projections, including potential revenue, expenditures, and cash flow. Understanding key hotel industry metrics like occupancy rate, average daily rate (ADR), and revenue per available room (RevPAR) will be important.

Property evaluation: Lenders will also be interested in the specific property you’re looking to purchase. They’ll consider its location, size, condition, star rating, and more. A property in a prime location or with high star rating might be viewed as a less risky investment.

Credit history: Like any loan, your credit history will be an important factor. Be prepared to provide documentation about your personal and business credit history.

Deposit: Commercial mortgages often require a larger down payment than residential mortgages – sometimes as much as 30-40% of the purchase price.

Legal documentation: Gather all necessary legal documentation. This might include licenses, permits, zoning compliance certificates, and proof of insurance.

Lender research: Different lenders have different criteria and terms, so it’s important to research various lenders. This could include traditional banks, credit unions, and lenders who specialize in hospitality or commercial properties.

Application: Once you’ve gathered all of the necessary information and chosen a potential lender, you can submit an application for a hotel mortgage.

Negotiation: If your application is successful, you may have room to negotiate the terms of your mortgage, such as the interest rate, the term length, and early repayment options.

Legal review: Make sure to have any mortgage agreement reviewed by a lawyer before signing.

Which lenders offer these mortgages

In the UK, there are several lenders that offer commercial mortgages for hotels, including major banks, building societies, and specialized lenders. These may include:

Barclays: Barclays offers a range of commercial mortgages for different types of businesses, including hotels.

NatWest: NatWest has commercial mortgage options for small to medium-sized businesses.
Lloyds Bank: Lloyds offers commercial mortgages and real estate finance that could be applicable to a hotel business.

Santander: Santander provides a variety of commercial finance options, including commercial mortgages.

HSBC: HSBC has a range of commercial mortgages suitable for different types of businesses.
Royal Bank of Scotland (RBS): RBS provides commercial mortgages for a wide range of business purposes.

Aldermore: Aldermore is a specialist lender that offers commercial mortgages for businesses.
Clydesdale Bank: Clydesdale Bank provides a variety of commercial lending options.

Shawbrook Bank: Shawbrook is a specialist savings and lending bank that offers commercial mortgages, including ones for hotel properties.

Together Money: Together Money provides commercial finance, including mortgages for businesses in various sectors.

Masthaven Bank: Masthaven offers a range of flexible commercial mortgages.

What are the typical interest rates for hotel mortgages?

The interest rates on hotel mortgages can vary significantly based on a number of factors. These include the creditworthiness of the borrower, the loan-to-value (LTV) ratio, the profitability of the hotel, the term of the loan, the location and condition of the hotel property, and general market conditions.

Interest rates on commercial mortgages, including those for hotels, in the UK typically range from around 2% to 6% above the Bank of England’s base rate. However, it’s important to note that rates can vary widely, and riskier ventures could face higher rates.

Specialist lenders or lenders with a specific focus on the hospitality industry may offer different rates. Furthermore, the specifics of the loan agreement, such as the length of the loan, whether the rate is fixed or variable, and the specifics of the repayment schedule, can all affect the rate offered.

How much can I borrow?

The amount you can borrow for a hotel mortgage will depend on several factors. Some of these factors include:

Loan-to-value (LTV) ratio: The LTV ratio is the ratio of the loan to the appraised value of the property. For commercial properties like hotels, lenders typically offer a lower LTV ratio compared to residential properties, often around 60-75%. This means if the property you’re interested in is valued at £1 million, you might be able to borrow £600,000 to £750,000.

Income and profitability of the hotel: Lenders will take into account the income generated by the hotel, its profitability, and other financial indicators such as occupancy rates and revenue per available room (RevPAR). They will likely require you to provide financial statements, revenue forecasts, and possibly even a business plan.

Your credit score: Just like with any other loan, your credit score and financial history will affect how much you can borrow. A higher credit score and solid financial history typically mean you can borrow more.

Your experience in the hospitality industry: Lenders may also consider your experience in the hospitality industry when deciding how much to lend.

Other debts or financial obligations: Any other debts or financial obligations you have may affect how much you can borrow. Lenders will look at your debt service coverage ratio (DSCR), which measures your ability to cover your loan payments, given your current income.

How do I calculate the amount I can borrow for a hotel mortgage?

To calculate the amount you can potentially borrow for a hotel mortgage, there are a few steps you can follow. However, remember that these steps provide a rough estimate, and the actual amount you can borrow will depend on the specific assessments made by your chosen lender.

Here’s a simple way to calculate:

Determine the property value: Begin with the value of the hotel. This could be the asking price if you’re purchasing, or you might need to have the property appraised if you already own it.

Calculate loan-to-value (LTV): Commercial lenders in the UK usually offer LTV ratios of around 60-75% for hotels, but this can vary. Multiply the property value by the LTV ratio to get an initial estimate of the loan amount. For example, if the property is valued at £1 million and the lender offers a 70% LTV, you might be able to borrow around £700,000.

Assess the hotel’s income: Lenders will also consider the hotel’s income and profitability. They may use a measure like the Debt Service Coverage Ratio (DSCR), which compares the hotel’s net operating income to its total debt service. A DSCR of less than 1 means the hotel’s income isn’t sufficient to cover the loan repayments, which could limit the amount you can borrow.

Consider your personal financial situation: Lenders will also take into account your personal credit history and other financial commitments. If you have a strong credit score and a low level of debt, you may be able to borrow more.

These are rough steps, and the actual process will be more complex and will depend on specific lender criteria.

What are the typical deposit requirements?

When it comes to commercial mortgages for hotel businesses, the deposit required is typically higher than what’s usually expected for residential mortgages. You can generally expect to provide a deposit of around 30% to 40% of the total property value.

So, for example, if the property you’re interested in is priced at £1 million, you should anticipate needing a deposit of around £300,000 to £400,000.

These figures are indicative and can vary significantly based on various factors, such as the financial strength of your business, your credit history, the profitability and location of the hotel, and the lending policies of the particular bank or lender.

Keep in mind that lenders view the deposit as a risk mitigator – the more you’re able to put down as a deposit, the less risk the lender takes on, which can impact the terms and rates you’re offered. It’s always best to speak with a financial advisor or a mortgage broker to understand the specific requirements and how best to prepare for them.

How much will your mortgage cost?

The total cost of a mortgage involves more than just the principal amount (the actual loan). You also have to consider the interest rate, the loan term, any fees, and potentially the cost of mortgage insurance.

Principal: This is the amount you borrow to purchase the property.

Interest: The lender charges you interest on the loan, which is typically expressed as an annual percentage rate (APR). The interest could be fixed (stays the same for the entire loan term) or variable (changes over time-based on market conditions).

Loan term: This is the length of time you have to repay the loan. Commercial mortgages often have shorter terms than residential mortgages – typically between 15 and 20 years, though this can vary.

Fees: There may also be various fees associated with the mortgage, such as arrangement fees, valuation fees, legal fees, and potentially early repayment charges.

To calculate the monthly cost of the mortgage, you can use a commercial mortgage calculator. You’ll need to input the principal amount, interest rate, and loan term. However, remember that these calculators typically only calculate the principal and interest payments – they might not include any additional fees or insurance costs.

Consider the following simple example:

Let’s assume you’ve secured a hotel mortgage of £1 million at a fixed interest rate of 5% per annum, with a term of 20 years. The monthly repayments would be approximately £6,599.

This equates to a total repayment of approximately £1,583,669 over the term of the loan, including around £583,669 in interest.

Please note this is a simplified example and doesn’t take into account any fees or changes in interest rates (if it’s a variable rate). It’s also worth mentioning that commercial loan calculations can be more complex due to factors such as amortisation schedules, interest calculation methods, and varying payment structures.

To get a precise understanding of how much a mortgage will cost, it’s best to speak with a financial advisor or lender.

What type of mortgage do you need to buy a hotel?

If you’re looking to buy a hotel, you’ll likely need a type of loan known as a commercial mortgage. Commercial mortgages are loans secured by commercial property, such as a hotel, instead of residential property.

Here’s an overview of commercial mortgages and why they are used for buying hotels:

• Commercial mortgages are typically used to buy business premises, develop a piece of land, or buy an existing business, which includes hotels. They can also be used to expand or refurbish an existing commercial property.
• Commercial mortgages usually have a term of between 3 and 25 years, which is shorter than most residential mortgages.
• The Loan-to-Value ratio on a commercial mortgage is often lower than on a residential mortgage, meaning you will need to provide a larger deposit upfront. Typically, you may be able to borrow 60-75% of the property’s value, so the deposit would be the remaining 25-40%.
• Commercial mortgage interest rates are typically higher than residential rates due to the perceived increased risk. The specific rate you’re offered will depend on factors such as your creditworthiness, the profitability of the hotel, and the LTV ratio.
• Commercial mortgages can be either repayment (where both the capital and interest are paid back monthly) or interest-only (where only the interest is paid monthly, and the capital is repaid at the end of the term).
• You may need to pay arrangement fees, valuation fees, and legal fees when setting up a commercial mortgage. Some lenders might also charge a fee for early repayment.
• The hotel property itself usually serves as the primary security for the loan. If you cannot meet the repayment terms, the lender has the right to seize the property to recover the funds.

It’s also important to note that many lenders will require evidence of a solid business plan and profitability forecasts for the hotel, as well as potentially some experience in the hospitality industry.

What other financing options can I use to buy a hotel?

In addition to commercial mortgages, there are several other financing options you might consider when looking to purchase, refurbish, or expand a hotel. Here’s a brief overview of the alternatives you mentioned:

Asset Finance: This is a form of financing where the loan is secured by an asset other than the property itself. This could include equipment, vehicles, or other assets owned by your business. If the loan isn’t repaid, the lender can seize these assets. This might be suitable if you have significant assets but wish to avoid placing the hotel property itself as collateral.

Development Finance: This type of financing is specifically designed for property development projects. It’s usually used when you’re planning to build a new hotel or make substantial structural changes to an existing one. The loan typically covers a proportion of the land purchase and building costs, and it’s usually short-term, typically 6 to 18 months, depending on the project’s length.

Refurbishment Finance: If you’re planning to renovate or refurbish a hotel, this might be a good option. This type of financing is specifically designed to cover the costs of refurbishment work. It’s typically a short-term option, meant to be repaid once the work is complete and the property’s value has increased.

Business Loan: A standard business loan could be used to purchase a hotel, though lenders might require a strong business case and proof of profitability. Business loans can be unsecured or secured, with different terms and rates available depending on your business’s financial health and the perceived risk to the lender.

Bridging Loan: A bridging loan is a short-term financing option designed to ‘bridge’ a gap between a debt coming due and the main line of credit becoming available. In the context of buying a hotel, you might use a bridging loan to purchase a property quickly, for example, at auction, then refinance with a commercial mortgage or sell the property at a higher price later on.

Each of these options has its pros and cons, and what’s best for you will depend on your specific circumstances, including your financial situation, your plans for the hotel, and your long-term business strategy.

Improving RevPAR means now is a good time to get hotel mortgages

Revenue Per Available Room (RevPAR) is a critical metric in the hotel industry that measures a hotel’s ability to fill its available rooms at an average rate. It’s calculated by multiplying a hotel’s average daily room rate (ADR) by its occupancy rate. A rising RevPAR indicates that a hotel is either increasing its occupancy, its average rate, or both and thus improving its overall performance.

Here’s why an improving RevPAR might indicate that it’s a good time to consider getting a hotel mortgage:

Improved profitability: A higher RevPAR generally indicates improved profitability for the hotel, which can make it easier to secure a hotel mortgage. Lenders often look at a hotel’s financial performance when deciding whether to approve a mortgage application and the terms to offer.

Increased property value: A hotel with a rising RevPAR may have an increasing property value, which could potentially enable a hotel owner to borrow more against the property.

Economic recovery: RevPAR can also reflect broader economic trends. If RevPAR is improving across the hotel industry, it could signal a recovering economy, which could make it an opportune time to invest in a hotel property.

Favourable lending environment: In a growing economy, lenders may also be more willing to extend credit, which can make it easier to get a hotel mortgage.

However, it’s important to consider other factors as well, such as the overall financial health of your business, the cost and terms of the mortgage, your ability to repay the loan, and your long-term business plans. As with any major financial decision, it’s a good idea to seek advice from a financial advisor or a mortgage broker.

Is lending appetite strong among hotel mortgage lenders?

Lending appetite among hotel mortgage lenders can be strong for several reasons. Here are a few possible explanations:

Resilience of the hotel industry: Despite short-term challenges such as those posed by the COVID-19 pandemic, the hotel industry has proven to be resilient over the long term. Many lenders see hotels as a strong investment, especially in prime locations or regions with strong tourism.

Strong revenue potential: Hotels have the potential to generate significant revenue through room rentals and ancillary services like food and beverage, events, and other amenities.

Asset-backed security: Hotel mortgages are secured by the property itself, which can be sold to recoup the loan amount if necessary. This collateral reduces the risk for lenders.
Improving Economic Conditions: As economic conditions improve, travel and tourism often rebound, leading to increased demand for hotel accommodations. This makes the hotel industry, and by extension, hotel mortgages, an attractive investment.

Diversification: For lenders looking to diversify their portfolios, hotel mortgages offer an opportunity to invest in the commercial property sector.

Low-interest rates: Generally, in an environment of low-interest rates, lenders are keen on financing assets with good returns and growth potential, such as hotels.

It’s important to note that while these factors can contribute to a strong lending appetite, the specific circumstances can vary significantly between different lenders, regions, and periods. Always consult with a financial advisor or mortgage broker for the most current and relevant information.

What type of insurance will I need when taking out a mortgage for a hotel?

When you take out a mortgage for a hotel, you’ll need various types of insurance to protect both your investment and the lender’s security on the loan. These typically include:

Buildings insurance: This is mandatory when taking out a mortgage and covers the physical structure of the hotel against risks such as fire, flood, and other damage. It should cover the full rebuilding cost of the property.

Contents insurance: This covers the replacement of contents within the hotel, such as furniture, kitchen equipment, and electronic systems.

Public liability insurance: This covers legal costs and compensation claims if guests or third parties are injured, or their property is damaged while on your premises.
Employers’ Liability Insurance: If the hotel has employees, this insurance is legally required in the UK. It covers you against claims from employees who’ve been injured or become seriously ill as a result of working for you.

Business interruption insurance: This covers the loss of income from unforeseen events, such as natural disasters or major repairs, that force your hotel to close for a period.
Loss of Licence Insurance: If the hotel sells alcohol, this insurance covers you if you lose your alcohol licence and as a result, the business suffers.

Commercial property insurance: This type of insurance provides coverage for your hotel building, contents, and other physical assets against perils like theft, vandalism, fire, and certain types of water damage.

Professional indemnity insurance: This may be needed if you give advice or provide professional service to guests. It can cover compensation claims if a guest loses out financially because of your advice.

Every hotel’s needs are different, and your coverage should be tailored to your specific situation. Working with an insurance broker experienced in the hospitality industry can help ensure you have the necessary coverage to protect your investment and meet the lender’s requirements. Remember to review and update your insurance coverages periodically to ensure they remain appropriate as your business and circumstances change.

How can I refinance a hotel mortgage?

Refinancing a hotel mortgage is a process similar to securing the original loan but with the goal of replacing the existing mortgage with a new one that has better terms. This can help you to reduce your monthly payments, shorten your loan term, switch from a variable-rate to a fixed-rate loan, or access capital for improvements or expansions.

Here’s a step-by-step guide on how you can refinance a hotel mortgage:

Evaluate your needs: Identify why you want to refinance. Are you looking for a lower interest rate, a shorter term, or do you need to pull out equity from the property?

Check your financials: Refinancing lenders will look at the hotel’s financial performance, as well as your personal credit history and financial situation. Ensure your accounts are in order, your credit score is in good shape, and you’re able to demonstrate the hotel’s profitability or potential for profitability.

Determine your property’s value: You might need an appraisal to determine the current value of your hotel. This will affect the loan-to-value ratio and the amount you can borrow.

Shop around: Contact several lenders to compare interest rates, terms, and fees. Each lender may have different refinancing programs available, so it’s important to understand your options.

Prepare your application: Gather the required documents, which may include financial statements, business plans, property details, and personal financial information.

Apply for refinancing: Once you’ve chosen a lender, submit your application. The lender will review your application, conduct a credit check, and arrange for an appraisal of the hotel.

Close on the new loan: If your application is approved, you’ll go through a closing process similar to the original loan closing. The new loan will pay off the existing mortgage, and you’ll begin making payments on the new loan.

What are some tips for securing a competitive interest rate?

Securing a competitive interest rate on a hotel mortgage can help you save a significant amount of money over the life of the loan. Here are some tips to help you secure a competitive rate:

Improve your credit score: Lenders often offer better interest rates to borrowers with higher credit scores. Paying your bills on time, reducing your debt levels, and checking your credit report for errors can all help improve your credit score.

Strong business financials: Demonstrate strong business financials and cash flow. Lenders want to see that your hotel is profitable and that you have sufficient cash flow to cover the mortgage payments.

Consider a larger down payment: If possible, consider making a larger down payment. This will lower the loan-to-value ratio, which can help you secure a lower interest rate.

Shop around: Don’t just go with the first lender you find. Different lenders offer different interest rates, so it’s important to get quotes from multiple lenders to ensure you’re getting the best rate.

Choose the right loan term: Shorter-term loans often come with lower interest rates than longer-term loans, although the monthly payments will be higher.

Consider a fixed-rate loan: If you think interest rates might rise in the future, consider a fixed-rate loan, which will lock in your interest rate for the term of the loan.

Hire an expert: Consider working with a mortgage broker who specializes in hotel financing. They can help you understand your options, find the best rates, and navigate the application process.

Strong business plan: A solid business plan that clearly demonstrates your hotel’s potential for success can help convince lenders to offer you a more favourable rate.

Remember, while the interest rate is an important factor in choosing a mortgage, it’s not the only factor. Be sure to consider other aspects of the loan as well, such as the terms, prepayment penalties, and any fees. Always consult with a financial advisor or mortgage broker to help you understand your options and make the best decision for your situation.

How do lenders view a hotel’s profitability when considering a mortgage application?

When considering a mortgage application for a hotel, lenders carefully evaluate the profitability of the hotel as it directly impacts the borrower’s ability to repay the loan. Profitability is often measured through several key performance indicators:

Revenue Per Available Room (RevPAR): This is a measure of the average revenue the hotel generates for each available room and is calculated by multiplying the average daily room rate by the occupancy rate.

Gross Operating Profit Per Available Room (GOPPAR): This is a measure of the hotel’s profitability after accounting for operating expenses. It gives lenders an insight into how well the hotel is managed.

Average Daily Rate (ADR): This measures the average rental income per paid occupied room in a given time period. A higher ADR can indicate higher profitability.

Occupancy Rate: This represents the percentage of available rooms that are occupied. Higher occupancy rates generally lead to higher profitability.

Income Statement: Lenders also look at the income statement, which outlines the hotel’s revenues, costs, and expenses, including details like room revenue, food and beverage revenue, payroll costs, and administrative expenses.

Lenders prefer hotels with stable or growing revenue and profitability metrics. However, they also understand that the hospitality industry can be cyclical, and temporary downturns in performance won’t necessarily prevent a hotel from getting a mortgage as long as the long-term profitability outlook is good.

If you’re applying for a hotel mortgage, it’s crucial to have detailed, accurate, and up-to-date financial records. A comprehensive business plan that outlines your strategy for maintaining or improving the hotel’s profitability can also be beneficial.

How to finance hotel refurbishments

Financing hotel refurbishments or renovations can be a significant undertaking, but it’s often necessary to keep the property appealing to guests and competitive in the market. Here are some common ways to finance hotel refurbishments:

Savings or retained earnings: If you have sufficient funds, using savings or retained earnings can be the most cost-effective way to finance a refurbishment, as you won’t need to pay interest or fees associated with borrowing. However, it’s important to ensure that you leave enough funds for operating expenses and any unexpected costs that might arise.

Business loans: Traditional business loans from a bank or other lender can be used to finance refurbishments. The terms and interest rate will depend on your creditworthiness and the financial health of your business.

Commercial mortgage refinancing: If you have a commercial mortgage on your hotel, you might be able to refinance it to release equity and fund your refurbishments. This involves taking out a new mortgage for a higher amount and using the extra funds for the refurbishment.

Refurbishment loans: Some lenders offer specialised refurbishment loans designed for property improvements. These are often short-term loans that are repaid once the refurbishment is complete and the property’s value has increased.

Asset-based lending: If you have valuable assets, such as equipment or vehicles, you might be able to secure a loan against them to fund your refurbishment.

Business credit cards: For smaller refurbishments, a business credit card could be an option. However, interest rates on credit cards are typically higher than other forms of financing, so it’s important to pay off the balance as quickly as possible.

Government grants or loans: Depending on your location and the nature of your refurbishment, you might be eligible for government grants or loans designed to support local businesses or promote tourism.

Investors: If you’re open to sharing ownership of your hotel, you could seek investment from a business partner or investor.

It’s important to carefully consider the costs, benefits, and risks of each financing option and choose the one that best suits your needs and circumstances.

Speak to a hotel mortgage broker

A hotel mortgage broker is a specialist advisor who can guide you through the complexities of financing in the hospitality sector. These professionals have in-depth knowledge of the industry and the specific requirements for hotel financing. Here are some reasons why speaking to a hotel mortgage broker can be beneficial:

Industry knowledge: Hotel mortgage brokers have a deep understanding of the hospitality industry and the specifics of hotel financing. They know which lenders are likely to be most receptive to your application and what terms you might expect.

Access to a wide range of lenders: Brokers have access to a broad network of lenders, including banks, non-bank lenders, and private lenders, some of whom you might not be able to approach directly.

Tailored advice: A broker can provide tailored advice based on your individual circumstances and the specifics of your hotel. They can help you understand how much you can borrow, what terms you might expect, and how to strengthen your application.

Negotiation: Brokers can negotiate with lenders on your behalf, potentially securing you a better deal than you might be able to get on your own.

Streamlined process: A broker can guide you through the application process, helping to streamline the process and saving you time and stress. They can also help ensure your application is complete and accurate, reducing the chance of delays or rejections.

Regulatory compliance: Hotel mortgage brokers are familiar with the legal and regulatory requirements for hotel financing and can ensure your application is compliant.

While a broker can be a valuable ally in the hotel financing process, it’s important to choose a broker who is reputable, experienced in hotel financing, and puts your interests first. Make sure to ask potential brokers about their experience, fees, the range of lenders they work with, and how they can help you secure the best possible hotel mortgage.