B&B Mortgage

A bed and breakfast mortgage is usually a commercial mortgage, because most B&Bs cross the threshold at which lenders treat the property as a trading business rather than a home. Affordability is assessed on the business's income and the valuation method rather than personal salary alone, so how the application is structured (lender, valuation basis and borrower entity) can make the difference between strong terms and a decline.

Mortgage Lane arranges B&B mortgages for purchases and remortgages, on trading and closed properties, for experienced operators and first-time buyers. Guest houses are financed in the same way: see guest house mortgages.

What mortgage do I need for a B&B?

Most bed and breakfasts are financed on a commercial mortgage, because the business use usually takes the property outside mortgage regulation. The dividing line is set by statute: a loan to an individual or to trustees is a regulated mortgage contract where at least 40% of the land is used, or intended to be used, as or in connection with a dwelling by the borrower or a related person. Where the owners' living accommodation is less than 40% of the property, so more than 60% is in business use, the loan is unregulated and is assessed on business income, the valuation method and trading sustainability rather than personal salary.

Where the borrower is an individual who lives on site and the living accommodation makes up 40% or more of the property, the loan is a regulated mortgage. The Financial Conduct Authority's Mortgages and Home Finance: Conduct of Business sourcebook (MCOB) then applies, and the MCOB rules bring additional consumer protections. Some lenders will consider a semi-commercial or residential product. Lender appetite for those cases varies, so measure the split between living space and letting space at the outset.

How much can I borrow with a B&B mortgage?

Borrowing on a B&B mortgage is the lower of two caps: what the debt service coverage supports and what the loan-to-value (LTV) limit allows.

For a trading B&B, lenders assess affordability from sustainable business income, such as net operating profit or EBITDA, rather than salary. On the B&B cases we arrange, lenders require that income to cover 125% to 175% of the annual mortgage cost, a test called debt service coverage (DSC). A 125% requirement signals a lower-risk case, and smaller, seasonal or higher-risk B&Bs are commonly stressed at 150% to 175%.

On those B&B cases, LTV is capped at 70% to 75%, which means a deposit of 25% to 30% of the purchase price. The valuation basis matters as much as the percentage. A trading B&B can be valued on a Market Value 1 (MV1) going-concern basis, which reflects the business's income and typically gives a higher figure than bricks and mortar alone. A closed or newly established B&B is usually valued on a bricks-and-mortar (vacant possession) basis, sometimes with personal income considered in support, usually at a reduced LTV. The final loan is whichever of the two caps is lower.

On the B&B cases we arrange, terms of up to 40 years are available, subject to the lender's criteria and the borrower's circumstances.

Why use a broker for a B&B mortgage?

B&B lending sits in a small corner of the commercial market, and lender selection determines both the valuation basis and the price.

Commercial underwriting differs from residential. Lenders assess business income, property use and the valuation method, a different discipline from salary-multiple lending with different evidence requirements. A specialist broker can identify which lenders actively support B&Bs and how their criteria differ on trading accounts, experience, owner occupation and minimum room counts.

The valuation strategy matters too. Whether the case runs on an MV1 going-concern valuation or on bricks and mortar affects the loan size, the LTV and the pricing, and the right basis depends on the trading history. For newly established or closed B&Bs with limited or no accounts, specialist lenders can consider personal income alongside the property value, which avoids a decline from lenders that require full trading accounts.