Pub Mortgages

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Pub Mortgages

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  • Up to 75% LTV
  • Vacant possession (VP) options
  • Going concern business purchases
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Pub Mortgages

Date

  • May 2, 2024

Category

Property Finance

Author

Joseph Lane

Pub Mortgages

'; FREE QUOTECONTACT US
  • Up to 75% Loan to Value

  • No accounts requried

  • Trading businesses

  • Going concern valuations

If you are looking to acquire a pub in using a Mortgage, then you have come to the right place. Mortgage Lane are award winning finance brokers, specialising in Commercial Mortgages. Consequently, we offer tailored financing options, including mortgages up to 70% LTV based on this combined valuation, with possibilities to extend up to 75% LTV through specialist lending avenues. Our expertise in navigating these bespoke requirements ensures that we provide the most suitable mortgage solutions, supporting pub owners in their business endeavours.

Specialist lending for pubs

Pub mortgages are slightly more specialist than standard commercial mortgages. This is due to factors such as the pub’s reputation, which significantly influences its success and viability, and the complex regulatory environment impacting its operations. Factors like the pub’s reputation and regulatory environment significantly influence its operational success, which in turn affects loan eligibility and terms. Lenders can often see pubs as risk, as a borrowers this can reduce your lending options. Using a broker like us at mortgage lane can help access lending avenues that can offer yield based valuations on trading pubs, or a mortgage for first time buyers looking to secure their first pub mortgage.

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how much can I borrow on a pub that is trading?

When you apply for a pub mortgage and looking to borrow against the business valuation, one of the key factors determining the amount you can borrow is the pub’s Earnings Before Interest, Taxes, Depreciation, and Amortization (EBITDA). This financial metric is used to assess the pub’s operating performance and cash flow by excluding non-operating expenses and non-cash charges. It provides a clear picture of the pub’s operational profitability.

How It Works: Lenders typically offer loans up to about 5.5 times your pub’s EBITDA. This multiplier provides a basis for calculating the maximum loan amount based on the pub’s proven profitability. For example, if your pub has an EBITDA of £100,000, under this guideline, you could potentially qualify for a loan up to £550,000.

Relevance to Pub Mortgages: This borrowing criterion is particularly pertinent to pubs due to the variability in their cash flows and the impact of management effectiveness and market conditions on their profitability. By basing the loan amount on EBITDA, lenders can more accurately gauge the pub’s ability to service the debt through its operational earnings, which is crucial for pubs where cash flow can fluctuate seasonally or due to other factors.

Considerations: It’s important for pub owners to maintain detailed and accurate financial records, as lenders will scrutinize these to understand the EBITDA accurately. The 5.5x EBITDA rule of thumb is a general guideline, and actual borrowing capacity can vary based on other factors such as the lender’s assessment of risk, the pub’s location, competitive landscape, and the borrower’s credit history and management experience.

Borrowing on a Pub Mortgage Without Accounts

For pub owners who may not have comprehensive accounts or detailed financial records, obtaining a mortgage is still possible, albeit with some limitations on the borrowing terms. In such cases, lenders generally offer up to 65% of the property’s value, based on a 90-day valuation.

Understanding 65% LTV: The loan-to-value (LTV) ratio indicates the percentage of the property’s value that you can borrow. An LTV of 65% means you can receive a loan amount that is 65% of the total appraised value of the pub. This is a common approach when detailed financial records are unavailable to substantiate higher borrowing based on business profitability.

What is a 90-Day Valuation?: A 90-day valuation refers to the estimated price at which the property could reasonably be sold within a 90-day period. This type of valuation is conservative and is used by lenders to ensure that, in the event of a default, the property could be sold quickly to recover the loan amount. For pub mortgages, this type of valuation provides a safeguard for the lender by basing the loan amount on a quick-sale value rather than the potentially higher open market value.

Relevance to Pub Mortgages Without Accounts: Using a 90-day valuation and limiting the LTV to 65% reflects the increased risk associated with lending without full financial transparency. It ensures that the loan amount remains within a range that is deemed recoverable under less-than-ideal circumstances.

For pub owners looking to secure financing without traditional accounts, it’s crucial to understand these terms and prepare for the implications they have on how much can be borrowed. This approach limits exposure for the lender but also affects the financing capacity for the borrower.


Experience not required for a pub mortgage

While experience in pub management is highly preferable for securing favorable mortgage terms, it is not essential for obtaining financing. At Mortgage Lane, we understand that new entrants to the pub industry also need opportunities to establish themselves. We offer various financing solutions designed to accommodate those without extensive experience, helping them access the necessary capital to start and grow their businesses. Our team is committed to working with all clients, leveraging other strengths they may bring to the table, such as a solid business plan or a prime location, to secure suitable financing options.

Importance of Experience in Pub Mortgages

Mortgage lenders perceive experienced pub operators as lower-risk borrowers because they have a proven track record of managing the operational and financial aspects of a pub successfully. Experience in the industry often translates to better risk management capabilities, from handling fluctuating revenues and navigating licensing regulations to managing staff and customer relations effectively.

Business Stability: Experienced operators are more likely to have established a stable customer base and smoothed out the operational kinks that new owners might struggle with. This stability is reassuring for lenders, as it suggests the business is more capable of consistent revenue generation, which is crucial for meeting repayment obligations.

Market Knowledge: With experience comes a deeper understanding of the market, including consumer preferences and competitive dynamics. Experienced pub owners are often better equipped to adapt to market changes and economic downturns, which further secures their position as favourable candidates for lending.

Better Pub Mortgage Options with Increasing Experience

Pub mortgage lenders often tier their financing options based on the borrower’s experience, with more attractive terms available as operators gain more years of experience:

  1. Higher Loan-to-Value (LTV) Ratios: Borrowers with more experience might qualify for higher LTV ratios, reflecting the lender’s confidence in their ability to sustain the business and manage larger loan amounts effectively. For example, while a new operator might access up to 65% LTV, an operator with three years of experience might qualify for up to 75%, but most products most competitively priced at 70%LTV

  2. More Favourable Interest Rates: Experience can also influence the interest rates offered. Lenders may provide lower rates to experienced operators as they pose a lower risk, reducing the lender’s potential for loss.

  3. Extended Repayment Terms: With proven business acumen and stability, experienced pub owners may also secure loans with longer repayment terms, offering them more flexibility and potentially lower monthly payments, which can help ease cash flow.

Pub mortgage valuation

Trading pub purchases or re-mortgage borrowers may look to lend against the trading valuation of the pub, otherwise known as a Market Value 1 (MV1) valuation, which values as a business.

MV1 valuation—short for “Market Value 1″—is a specific type of property appraisal used to determine the value of a pub as a going concern. This means the valuation assesses the pub not just as a piece of real estate, but as an operational business, including its fixtures, fittings, and the goodwill associated with its ongoing operations.

Key Aspects of MV1 Valuation for Pubs:

  1. Holistic Assessment: An MV1 valuation takes into account both the physical property and the business itself. This includes evaluating the pub’s profitability, customer base, location, reputation, and any associated licenses that are crucial for its operation.

  2. Going Concern: The term “going concern” implies that the valuation assumes the pub will continue to operate into the foreseeable future. The assessment focuses on the ability of the business to generate future cash flows, which is critical for lenders in determining the viability of the loan.

  3. Purpose for Lenders: Lenders rely on MV1 valuations to understand the full scope of what they are financing. This type of valuation helps lenders gauge the potential risks and returns associated with lending against a pub, as it provides a more accurate picture of the business’s ongoing viability and profitability.

  4. Impact on Financing: The outcome of an MV1 valuation can significantly impact the financing terms, such as the loan-to-value ratio and interest rates. A higher valuation might enable pub owners to access better financing terms, reflecting a lower risk to lenders.

Understanding an MV1 valuation is crucial for prospective borrowers because it affects how much they can borrow and under what conditions. It assures lenders that the pub has been evaluated with an understanding of its operational context, leading to a more informed lending decision.

Pub mortgages property types

  • Grade 1 listed pub mortgages
  • Grade 2 listed pub mortgages
  • Hotel and pub business mortgage
  • Pub and restaurant business mortgage
  • Mixed use pub mortgages

Pub mortgages we can assist with

  • Borrowers that are Non homeowners
  • Borrowers with previous liquidations
  • Pubs with no financial accounts
  • Borrowers with adverse credit
  • Borrowers with no experience

 

TYPICAL TERMS FOR A LOAN ON A PUBLIC HOUSE

  • 70% Loan to value
  • 0.75% product fee added above LTV
  • 3 year fixed 7.19%
  • 5 year fixed 7.29%
  • No exit charges

QUESTIONS ABOUT PUB MORTGAGES  

Can I get a pub mortgage for leasehold ownership?

Freehold pubs are owned outright, while leasehold pubs involve renting the property from a landlord. Lenders may have different requirements and terms for each type. With Leasehold, some lenders will have a minimum length to be remaining on the tenure to be an acceptable security, so it is best to check with a broker to make sure you are looking at a pub with good mortgage options available in relation to the length of term remaining on the leasehold. Small terms remaining on a pub may impact the valuation of the building, but it also best to check with your solicitor any potential extensions you may be able to apply for to expand on your funding options.

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Can I buy a closed pub?

Yes.

A trading pub with an existing business is generally viewed more favourably by lenders than a pub that is closed or needs significant renovation. This is because a trading pub has a tracked record and a closed pub can only provide projections which comes with reduced certainty for a lender. However, you will be able to achieve mortgage options, but this may come with lending based on the vacant possession, or bricks and mortar. Usually lenders may propose to lend based on a 90 day valuation which assumes it is sold to a buyer within 3 months of advertisement and this is usually lower than Bricks and Mortar, vacant possession (VP).

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High street VS specialist lenders for pub mortgages?

When considering a pub mortgage, choosing between specialist lenders and high street lenders involves weighing the benefits and requirements of each:

High Street Lenders

Often, established high street banks can offer competitive interest rates for pub mortgages, making them a cost-effective option, they might also insist on a repayment mortgage rather than interest only.

High street lenders typically require borrowers to have substantial experience in the hospitality industry. They prefer applicants with a proven track record of successfully managing or owning similar businesses.

Specialist Lenders

Specialist lenders are more flexible regarding the experience requirements. They are willing to work with borrowers who may not have an extensive background in the industry, however, this can mean they might offer less favourable interest rates and might lend upon a valuation which will be based on the brick and mortar, rather than its commercial investment valuation.

Over the years, specialist lenders have become more competitive in their rates, narrowing the gap with high street lenders and providing attractive financing options.

Specialist lenders might also offer interest only mortgage options which can benefit borrowers from having access to more cash flow instead of choosing to amortise the loan.

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What are pub refurbishment loans?

Pub Refurbishment Loans

When considering pub refurbishment loans, it’s crucial to understand the specifics of development finance to ensure successful project completion.

Loan to Gross Development Value (GDV)

These loans typically offer a maximum of 65% of the GDV. This means the lender will fund up to 65% of the projected value of the pub after refurbishment.

Day 1 Purchase

Up to 60% of the purchase price can be financed initially, which covers the cost of acquiring the property.

Build Costs

Lenders may cover up to 100% of the refurbishment costs, subject to the total loan not exceeding the GDV limit.

Exit Strategy

The exit strategy is the most critical aspect of short term funding. Lenders need a clear plan on how the loan will be repaid, which could include selling the refurbished property or refinancing into a longer term mortgage. A well defined exit strategy will be required by the lender to prove the borrower will be able to repay the loan via remortgage or sale.

Valuation

Both the current and potential value of the property will be assessed to determine loan amounts and feasibility.

Be aware that for pub remortgage exits, your investment valuation will not increase until you have generated a years trading on the pub once it has been refurbished, so sometimes a 24 month bridge can be useful to allow you to complete the refurbishment and to obtain updated accounts in view of the upgraded interior and amenities.

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Are there exit fees on pub mortgages?

No, Mortgage Lane works with lenders that don’t charge mortgage exit fees on fixed rate mortgages. This ensures that you won’t incur additional costs when you decide to pay off your mortgage early or refinance your loan. This makes managing your pub mortgage more straightforward and cost effective, providing financial flexibility when your business needs it.

Some lenders do however charge exit fees, so it is important to let your mortgage broker know if this is a requirement so it can be factored into sourcing your most suitable pub mortgage product.

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Can I get a pub mortgage for freehold ownership?

As freehold pubs are owned outright, they are a preferable tenure compared to leasehold and will be easier to understand the valuation of the bricks and mortar. Freehold pubs are acceptable to most mortgage lenders and is therefore the most ideal type of pub purchase when it comes to funding.

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What might lenders expect for a pub mortgage?

Expect to pay a higher deposit than for residential mortgages, commercial mortgages are usually less generous. Typically, pub mortgage lenders require between 25% to 40% of the purchase price.

A pub mortgage lender might also require a detailed business plan, demonstrating the viability of the pub is crucial. This should include financial projections, market analysis, and your business strategy; if you already own pubs, details of your experience and existing trading might also be a strong element of this plan.

Lenders prefer applicants with experience in the hospitality industry. If you lack experience, partnering with an experienced manager or team can be beneficial, however, we also are able to obtain pub mortgages without experience, this will just increase the cost as it will reduce your options and might also impact the valuation of the property.

A strong credit history is essential. Lenders will scrutinise your credit report to assess your reliability in repaying the loan some lenders will also refer to other companies you own also for credit data which can also be used in underwriting for a lending decision.

You must provide proof of income, including tax returns, bank statements, and other financial documents. For an existing pub, past financial performance records are required to establish a valuation on the going concern rather than as a vacant asset.

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What are my repayment options on a pub mortgage?

Interest only

Borrowers pay only the interest during the term, with the principal repaid at the end.

Capital repayment

Borrowers pay both the interest and a portion of the principal during the term, reducing the loan balance over time.

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Will I need to pay taxes when getting a pub mortgage?

When purchasing a pub with financing through Mortgage Lane, it’s essential to consider the following tax obligations.

Stamp duty is usually payable upon completion of the purchase unless the property value falls below the minimum threshold.

The funds for stamp duty cannot typically be borrowed from your mortgage lender and must be provided from your own capital.

On some pub purchases, VAT will be due on the purchase price. This VAT can often be reclaimed post-completion. For pub purchases where VAT is applicable, Mortgage Lane can usually provide a VAT loan for up to 100% of the VAT amount. This loan helps cover the VAT cost until it can be reclaimed, see our VAT bridging page here.

This is not tax advice and we do recommend you speak to a tax advisor when purchasing a pub. 

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