Bed and breakfast mortgages
Mortgage Lane can be your trusted partner in securing a Bed and breakfast mortgage. Navigating the unique financial requirements of Bed and Breakfast (B&B) mortgages can be complex, but our team of dedicated expert brokers are here to simplify the process and help you achieve your dream of owning and operating a successful bed and breakfast. Whether you are an experienced Bed and Breakfast operator or looking to acquire one for the first time, we can connect you with market leading mortgage options.
Residential Mortgage for bed and breakfast
For B&Bs that operate as a home and a bed and breakfast for guests, borrowers are able to obtain up to 75% loan to value. Affordability is usually 5.5x NET profit or EBITDA otherwise known as Earnings before Tax, Depreciation, Amortisation (EBITDA). Mortgage options are available for both experience operators and first timers!
Commercial Mortgage for Bed and Breakfast
If you are looking for a Commercial Mortgage for a Bed and Breakfast, products are available up to 75% loan to value. Affordability for owner occupied B&Bs is usually up to 5.5x Earnings before Tax, Depreciation, Amortisation (EBITA) or NET profit. For investment purchases where you will lease the building to an experienced operator, affordability will then be based on the value of the lease and stress tested against the interest rate payable for 5 year fixed products and occasionally with an extra 2% stressed on 2 year fixed or variable/base rate tracker options.
Mixed-Use Bed and Breakfast Mortgages
Perfect for properties that combine accommodation and hospitality elements, such as a restaurant and a pub within the complex. Pubs and restaurants are a great addition to a bed and breakfast, with added revenue streams, these property types are able to obtain lending based on affordability assessments including profits from the bed and breakfast bookings as well as the pub and restaurant included in the complex.
Short term funding for B&Bs
Acquiring and developing a B&B property often requires specialised lending solutions. Whether you are purchasing a new property, renovating an existing one, or expanding your current B&B, our bridging and development finance options are designed to meet your unique needs.
Bridging finance is a short-term loan designed to provide quick access to funds. It’s ideal for situations where you need to secure a property quickly or need temporary funding until a more permanent financing solution is arranged. This can be useful for B&B renovations and where the borrower has minimal experience in operating a B&B, which can impact the re-mortgage options in terms of valuation methods used by the valuer, where there is no accounts available, borrowers using bridging loans to purchase and renovate a B&B might also benefit from a longer term such as 24 months to also obtain year end accounts showing 12 months of good trading post refurbishment.
Borrowers looking to obtain funding to acquire and renovate a B&B can obtain a refurbishment loan or development finance, which could also provide a lending vehicle to obtain trading accounts post refurb, terms on development finance or a refurbishment loan are available up to 36 months.
QUESTIONS ON BED AND BREAKFAST MORTGAGES
While some of the more generous and cost-effective B&B mortgage options may require a minimum income, this is not standard across all lenders. Many lenders understand that bed and breakfast businesses can have varied income streams and are willing to assess applications on a case-by-case basis, so even if you are landlord with only a small income, this should be sufficient for mortgage lending.
A 90 day valuation, also known as a “quick sale” or “forced sale” valuation, estimates the price a property could realistically achieve if it needed to be sold within a short period, typically 90 days. This type of valuation is generally more conservative and reflects a lower price due to the urgency of the sale.
The value is often lower than a standard market valuation because it assumes the property must be sold quickly, potentially at a discount.
Lenders use this valuation to mitigate risk, ensuring they do not lend more than the property could fetch in a quick sale scenario.
For B&Bs, a 90-day valuation may not fully consider the income-generating potential of the business, focusing instead on the property’s physical assets and immediate market conditions.
An investment valuation assesses the value of a property based on its ability to generate income. This approach is particularly relevant for commercial properties like B&Bs, where the property’s value is closely tied to its operational performance.
The valuation considers the revenue and profitability of the B&B, including occupancy rates, room rates, and other income streams.
Detailed financial accounts and projections are used to evaluate the business’s ongoing viability and growth potential and because it reflects the business’s earning potential, the investment valuation is often higher than a 90-day valuation, making it more favourable for securing larger mortgage amounts.
Many commercial mortgage lenders operate with a closed legal panel, meaning you must choose a solicitor from their approved list. This ensures that the solicitor is experienced and trusted by the lender to handle the specific requirements of a B&B mortgage.
Sometimes, you can opt for joint representation, where two solicitors from the same firm act separately for the lender and for you. This can streamline the process while ensuring that both parties’ interests are adequately represented.
Alternatively, you can choose to have the panel solicitor act for the bank while your chosen solicitor represents you. This might be preferred if you have a solicitor you trust who is not on the lender’s panel.
Regardless of the setup, as the borrower, you will cover the legal costs for both solicitors. It’s important to factor this into your overall budget.
Most lenders will expect your solicitor to have at least three Solicitors Regulation Authority (SRA) approved managers. This ensures that the firm handling your case has sufficient expertise and meets regulatory standards.
Buy to let mortgages are designed for residential properties classified under use classes C3 (dwelling houses) or C4 (houses in multiple occupation, HMOs). These mortgages are tailored for properties intended to be rented out to tenants for residential use.
While some buy to let mortgages may allow for mixed-use properties, this generally includes scenarios where the majority of the property is residential with a small commercial element, such as a shop with a flat above it.
Bed and breakfast properties fall under the C1 use class in England and Wales, or Class 7 in Scotland, which designates them as commercial properties. This classification includes hotels, guest houses, and B&Bs, which are primarily used for providing accommodation on a short-term basis.
Due to their commercial nature, B&Bs are underwritten differently from residential buy to let properties. They require commercial mortgages that take into account the business’s income potential, operational costs, and other commercial factors.
To finance a B&B, you will need a commercial mortgage specifically designed for properties within the C1 use class. These mortgages consider the unique aspects of running a B&B, including revenue from guests, seasonal fluctuations, and operational expenses.
Just like with standard mortgages, there are commercial mortgage lenders who are willing to consider applicants with adverse credit. This includes those with missed payments, County Court Judgments (CCJs), defaults, or even an Individual Voluntary Arrangement (IVA).
If you have been discharged from bankruptcy, your mortgage options will improve over time. Generally, your chances become significantly better after 3 years and continue to improve after 6 years.
B&B mortgage lenders will review your entire credit history, including any adverse events. While some lenders are more flexible, they will still assess the overall risk based on the severity and recency of the credit issues.
Demonstrating a stable income and financial stability can help offset the adverse credit factors. Lenders will look at your ability to manage the mortgage payments going forward.
You may be required to provide a larger deposit if you have adverse credit, as this reduces the lender’s risk.
High street lenders often offer more competitive interest rates for established commercial mortgages. These rates can make a significant difference in the long-term cost of your mortgage.
However, high street lenders typically require borrowers to have substantial experience in running a business, particularly in the hospitality sector. This experience helps mitigate the perceived risk from the lender’s perspective.
High street banks are well-established and provide a sense of security and stability. They have extensive resources and customer support services.
The application process with high street lenders can be more cautious, with stricter lending criteria and thorough assessments of your financial history and business plan.
Specialist lenders are often more flexible regarding experience. They may be more willing to work with first time B&B owners or those with limited experience in the industry.
Over the years, the rates offered by specialist lenders have become more competitive. While they might be slightly higher than high street lenders, the flexibility and tailored approach can be worth the additional cost.
No, however it can be advantageous to have experience or to precure experience.
Lenders who offer the most favourable terms, such as lower interest rates and higher loan amounts, often prefer borrowers with prior experience in managing a B&B. Your experience can reassure lenders of your ability to successfully operate the business, making them more likely to approve your mortgage application.
Experienced operators can access lenders who use more generous valuation methods. For example, lenders may base their loan on the investment valuation of the business rather than the vacant possession value of the property. This means they consider the income-generating potential of the B&B, which can result in a higher loan amount.
To exit a good B&B refurbishment scheme and get an investment valuation, you will need accounts showing the B&B’s financial performance. This helps in recycling capital used for renovations. Similarly, when buying an existing B&B that is already trading, experience allows lenders to provide a mortgage based on the business’s investment value rather than just the property’s bricks and mortar value.
Without experience, you might only qualify for loans based on the 90-day bricks and mortar valuation. This often means a lower loan amount and the need for additional cash to fund the purchase, as lenders perceive a higher risk.
New B&B owners without experience may need more upfront cash to cover the difference between the property’s purchase price and the lower mortgage amount offered based on its vacant possession value.
When using development funding for a B&B, it’s common to allow for a 24-month term. This period includes time to refurbish the property and then trade for 12 months post-renovation. This trading period helps meet experience requirements and provides financial records that can support an investment-based mortgage valuation.
Using a standard commercial mortgage you will typically need a deposit of at least 25% of the property’s purchase price.
In addition to the deposit, you will also need to cover stamp duty costs.
For a B&B priced at £1000,000, you would need a deposit of £250,000 plus stamp duty.
Bridging or development finance usually requires a higher deposit, typically around 30-35% of the property’s purchase price.
As with standard mortgages, you will need to cover stamp duty costs. VAT may also be applicable, especially if the property includes commercial elements.
VAT might be charged on the purchase, which can be a significant additional cost. However, VAT bridging finance is available to cover this cost, which can be reclaimed later.
We assist our clients with Mortgages for B&Bs in England, Wales, Scotland and Northern Ireland.
Yes, you can purchase a bed and breakfast using funds from a Self-Invested Personal Pension (SIPP) or a Small Self-Administered Scheme (SSAS).
Ensure that your SIPP or SSAS provider permits the use of funds for purchasing commercial property, such as a B&B. This is typically allowed, but it’s essential to confirm with your pension provider.
We work with mortgage lenders who recognise and accept SIPP and SSAS funds. These lenders are familiar with the structure and requirements of using pension funds for property investments.
Lenders will need to review the trust documents associated with your SIPP or SSAS. This documentation verifies the legitimacy and intent of the pension fund to invest in the property.
You can use funds from your SIPP or SSAS to cover the deposit for a B&B when securing a commercial mortgage. This allows you to leverage your pension savings to invest in a revenue-generating property.
Alternatively, the pension fund itself can apply for a mortgage in the name of the SIPP or SSAS. This means the mortgage is held within the pension fund, and the property becomes an asset of the pension.
Using pension funds can be a tax-efficient way to invest in property, as income generated by the B&B and any capital gains upon sale can be tax-advantaged within the pension, but we do advise you to confirm your tax position with a relevant tax professional.
Some B&B mortgage lenders do not have a maximum age and others may have a maximum age on application of age 85, whilst this is not the same for all lenders, there will be funding options available regardless of your age.
Lenders will look at your income sources, including pensions, investments, and any other revenue streams, to ensure you can comfortably manage mortgage repayments.
Having a clear exit strategy is crucial. This might involve plans for selling the B&B in the future, transferring ownership, or other ways to repay the mortgage.
Retired individuals often bring valuable experience and stability, which can be appealing to lenders. This experience can be particularly relevant in managing a B&B successfully.
Many lenders offer flexible mortgage terms for older borrowers, including interest-only options and longer repayment periods, tailored to suit post retirement financial situations.
Many lenders provide the option to overpay up to 10% of the principal loan amount per annum without incurring penalties. For example, if your principal loan amount is £125,000, you could repay an additional £12,500 each year without any extra fees.
Overpaying can significantly reduce the total interest paid over the life of the loan, as the principal balance decreases faster.
Making regular overpayments can help you pay off the mortgage sooner than the original term.
It is important to note that many commercial mortgage lenders are removing the overpayment facility from their product offerings. This change means that overpayments beyond the standard terms may incur early repayment charges or penalties.
Always check the specific terms and conditions of your mortgage product to confirm if overpayments are allowed and under what circumstances. This will help you avoid unexpected fees.