Owning a hotel can be highly lucrative, and whether the property is a large city-centre 5 star establishment or a smaller countryside getaway, ensuring that the correct type of finance is put in place is crucial. If a reliable, stable funding solution isn’t arranged which covers all the requirements of owning and operating a hotel, this could compromise the business’ earning potential, and make it more difficult to turn a profit. For entrepreneurs who wish to open their own hotel, or for hoteliers in need of refinance options, there are a wide variety of solutions on offer from lenders of all sizes.
It’s important to understand the basics of hotel mortgages before going any further; this is because the finance on offer can be highly specialised, and cater to different types of business. A mortgage designed for quick investment and minimal repayments will not necessarily suit a long-term owner, and the varying criteria of these different mortgage terms will determine who they’re best suited to.
Modern Hospitality Finance – What’s New?
Over the past fifty years or so, the financial landscape has changed dramatically. What was once a strictly-controlled and rigidly restricted form of lending has now become a much more fluid and flexible system, which offers many more opportunities for bespoke brokers to operate. Up until recently, the UK mortgage market was controlled by major high street banking corporations; under the law of the land, lending was tightly restricted to only a few permitted formats, and borrowers had to bend over backwards to meet the criteria for these loans. These regulations weren’t held to promote security: rather, they represented an inherent inflexibility in the banking system which strangled businesses. Although businesses could still obtain funding through these channels, they forced borrowers to meet a narrow set of requirements which often didn’t reflect their situation.
However, as time has gone on, the opportunities offered by smaller, more flexible lenders have become evident. Thanks to a steady deregulation of the mortgage market since the 1960s, it’s now possible for bespoke mortgage providers and brokers to arrange funding for a wide range of different clients. This is a win for both the lenders and the borrowers, because each of them finds the ideal partner to work with; the borrower can obtain a loan which suits their business goals, while the lender is able to pick and choose which businesses they lend to.
What this means for both existing and start-up hoteliers is that a much wider range of options is available than might first be imagined. Understanding the different types of loan on offer and how they can suit different businesses and their goals is vitally important before moving forward with any plans for finance. We’ll discuss some of the major options which hoteliers have for finance, and the various advantages and disadvantages. We’ll also look at the different purposes for which finance can be obtained, which will aid hoteliers in deciding which loan is right for them.
Arranging a Hotel Mortgage
Any homeowner knows that sorting out a mortgage is not a quick and straightforward affair; it takes time, and it takes planning. This goes double when the mortgage is for a commercial property, such as a hotel or B&B, and the first and foremost consideration for anyone seeking funding is to plan ahead. It’s vital to know what the basic terms of a hotel mortgage are before proceeding further, so we’ll look at some of the basic terms inherent to almost all mortgages.
The “loan to value”, (commonly abbreviated as “LTV”), represents the portion of your purchase which the loan constitutes. If, for instance, you’re purchasing a £300,000 property and you borrow £240,000 from a lender to do so, you’ll be borrowing 80% of the property value as a loan: hence, the LTV of this loan would be 80%. In residential mortgages, it’s not uncommon to see LTVs as high as 90% (or even 95% in some cases), but in the commercial market LTVs are generally held at a more conservative 70-80% (though some lenders will be able to meet requirements for a higher LTV).
A mortgage is a “secured" loan, which means that if you fail to repay the lender can repossess your property and sell it to recoup their loan. The higher the proportion of the property’s value they’ve already invested, the harder it will be for them to recoup their loan; the more they have to make back, the more difficult it will be for them to make their money back. Therefore, the higher the LTV is, the more the lender will charge in interest to provide the loan – this represents the additional risk they’re carrying.
With some lenders, it’s possible to secure your loan against assets other than the property you’re purchasing. In these cases, it’s sometimes possible to obtain 100% of the purchase value of a property, if sufficient security can be arranged for the loan. This usually requires the borrower to own an asset of enough value to offset against the value of the loan, and could be an existing commercial or residential property. A 100% LTV mortgage can be a very useful form of finance for a business which is looking to expand, but also brings a greater exposure to the borrower, since if they fail to repay they run the risk of losing both their new premises and the one on which the loan was secured.
Unlike with residential mortgages, hotel mortgage providers are aware that in the fast-moving world of commercial investment it’s important to provide funds quickly and reliably. Deals often hinge on the speed with which investors can move, and a buyer who’s able to put their finances in place quickly will usually get first shot at the best deals. Thanks to the flexibility of specialist hotel mortgage providers, it’s often possible to arrange finances within a tight timeframe, which allows hotel owners to take advantage of opportunities as they arise.
Most residential mortgages are for under a million pounds. This is because few people need to buy a home that’s particularly large, and though there certainly are parts of the country where even a two-bed semi can cost a seven figure sum, the vast majority of residential mortgages fall under this amount. For commercial investment, though, there are many properties which require funding over and above the million pound mark, which requires funding from specialist providers.
Arranging for finance from a specialised hotel finance broker will allow buyers to work with a firm experienced in the organisation of high value loans – it’s better to be working with a business who deal almost exclusively with £1m+ mortgages than one for whom this is a special case. Therefore, high value mortgages are offered by a wide range of specialist hotel finance brokers who can provide a wide selection of loans to suit different business objectives.
The demands of commercial lending can often create a market for very different repayment schedules to residential mortgages. This is one of the key differences which sets residential and commercial mortgages apart. The standard residential mortgage takes monthly payments towards both the loan capital and the interest on the loan; this is because most homeowners are keen to build equity in their home, and are happy to contribute to repaying their initial loan. A commercial investor might have very different priorities, though, and for many businesses there’s a strong incentive to keep monthly cash flow to a maximum – this enables the business to re-invest and remain solvent, expanding their operations to increase profits.
Therefore, it’s often valuable to repay only the interest on the mortgage, which is known as an “interest only” repayment plan. This type of repayment schedule keeps monthly payments to a minimum, since the business is only paying to service the loan. However, this means they make no contributions towards repaying the capital itself, and once the term expires they’ll need to repay the loan. This could either be with the earnings accrued throughout the business’s existence, or through the sale of the premises; either way, the full amount of the mortgage must be repaid.
Interest only mortgages are a good choice for a business which needs to make the most of its cash flow, but require careful planning to ensure an adequate “exit strategy” is put in place for repayment of the loan. A lender will typically require their clients to submit a detailed plan of how they intend to repay the loan at the end of the term, to guarantee that they’re able to meet their repayment responsibilities.
Different Borrowing Options for Hotel Mortgages
Just as every hotel is different, so it goes that every hotel owner is different. Even owners of hotels in the same area, with the same nominal value and even the same clientele will still have different financial situations and goals. The sheer variety of needs within the hotel mortgage market means that providers of loans have to be flexible in order to meet the differing requirements of their various clients. Some of the most popular types of borrowing needs are outlined below, and the different emphasis each type of buyer places on each aspect of their investment determines what loan will best suit them.
The Start-Up Hotelier
Getting in to the hotel ownership business can be a great way to build a lasting career. Hotels have proven to be one of the most resilient businesses in recent years, and despite economic uncertainty have shown to produce stable, reliable income for their owners. Becoming a hotel owner can necessitate a good deal of groundwork, but is certainly an achievable goal; however, it will determine to some extent the most appropriate type of finance required.
Getting a new hotel off the ground is one of the most difficult challenges a new owner can face, and the need to keep operating costs low is foremost amongst a new hotelier’s concerns. Therefore, a start-up hotel owner might benefit most from an interest-only repayment plan, since this will allow them the flexibility in their balance sheet to re-invest their earnings in new opportunities. Especially at a time when the business is looking to grow, it’s imperative to minimise expenses, and contributing to equity in the hotel might not be the right choice at the beginning of the new business.
Developing a hotel from a single small business into a larger one or even a chain requires substantial funding, which can be difficult to arrange when restricted by a business’ cash flow. The owner of a single hotel premises might well want to take on a new property, and there may well be attractive opportunities for investment available; it’s difficult, however, to raise the necessary capital purely from operating income, and it’s hard for businesses to justify capital being sat in the bank when it could usefully be invested elsewhere in the business.
This incentive to keep “cash on hand” to a minimum means that when investment opportunities come along many businesses struggle to seize them. Being able to leverage existing assets to secure finance for expansion is highly valuable, since it allows businesses the best of both worlds; they can raise the funds to buy new premises (or to extend existing ones), without needing to keep money in the bank “just in case”. For expanding businesses, the ability to take on a 100% LTV mortgage is valuable, and should be considered as a useful way of extending the hotel’s earning potential.
Switching mortgage provider is becoming an ever easier and faster task, even for high value mortgages. Being able to swap from one lender to another is a highly useful option for hotel owners, since they can constantly keep up with the best deals on the market – many lenders offer a “fixed interest period”, which expires after a few years, and this can be extended more or less perpetually by swapping from one provider to another. It’s important to note, though, that some mortgages come with an early repayment clause which makes swapping prohibitively expensive, sometimes charging as much as 3% of the mortgage value as a fee. To guarantee the best chances of securing a better mortgage deal in the future, borrowers should seek out a deal which allows them to switch at will.
For residential homeowners, there is an additional incentive to switch after a few years of ownership. A repayment mortgage plan slowly builds up equity in the property, meaning that the owner owns a greater percentage of their home’s value. As a result, if they decide to remortgage with another provider, they are essentially providing a larger deposit; the LTV of their new mortgage deal will be lower. This is one of the most important factors in securing a cheap mortgage deal, as the larger a deposit you can supply the better a deal you’ll typically be offered. For hotel owners, although a capital repayment plan is an unlikely choice, it’s worth bearing in mind that a better mortgage deal can often be secured if a larger deposit is provided; if it’s possible to contribute an extra overpayment to the hotel’s mortgage before switching provider, it’s sometimes possible to improve the mortgage deal you’re offered.
What to look for in a lender
There are so many different mortgage providers around nowadays it’s often hard to know what to look for. However, there are some attributes which any good lender has, which you should look for when selecting a mortgage provider:
- Suitable Products:
Obviously the lender you choose must carry the specific types of mortgage which you’re looking for. They might be perfect otherwise, but if they can’t accommodate your needs, you’ll have to look elsewhere.
- Good Track Record:
Stability is a hugely important factor when considering which lender to choose. Try to select a provider who has a proven ability to provide secure and reliable funding for their clients. If you can find a personal recommendation, so much the better – otherwise, be sure to check around for online testimonials.
As discussed previously, the hotel mortgage market is one which benefits from a great degree of adaptability. Lenders who are willing to meet the needs of their clients are often able to provide the best solutions, so look for a lender who prides themselves on customer service and flexibility.
- Good Lender Links:
Many specialist hotel mortgage providers do not provide funding themselves; instead, they are mortgage brokers, and act as intermediaries between the client and their investors. The best deals are available from brokers with the best links, so it’s important to seek out brokers who have strong links with the right lenders.
Hotel Mortgages in the Future
Hotels are one of the longest-running industries in the world, and the business of hospitality has changed little in thousands of years. Ownership of hotels is still seen as a stable and reliable investment, and despite the many technological innovations of the past decades it’s clear that hotels and hotel mortgage providers still have a large part to play in the UK’s economy.
Official resources about UK financial regulation:
- Bank of England Website
- Prudential Regulation Authority
- Financial Conduct Authority
- The Financial Policy Committee
- Financial Services Compensation Scheme
Other Unofficial Guides
Covering areas of UK regulation on and aspects of Hotel Mortgages.
- Buy To Let Mortgage
- Foreign Currency Mortgage
- Help To Buy Mortgage
- Listed Buildings Insurance
- Million Plus Mortgage
- Short Lease Mortgage
- The Bank of England
Research provided by Falbros